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Much Ado About a Lot in ETFs

Posted by Cinthia Murphy on Jul 27, 2022 9:30:00 AM
Cinthia Murphy
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There’s a lot going on in the ETF space these days, so we thought we’d highlight three quick things that are top of mind this week.

Earnings, Earnings, Earnings

For starters, we are in the middle of earnings season, and more than 170 companies – including key tech giants such as Microsoft and Apple – are reporting Q2 results this week. About 1/3 of all US equity ETFs own shares of Microsoft; some 30% own Apple. Their earnings impact ETFs across the board.

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For ETF investors, where built-in portfolio diversification typically helps soothe the nerves come earnings surprises, jitters are still real. Why? When correlations are defying historical precedence, and models and allocations that we’ve come to rely on for risk diversification are failing to deliver the same type of protection, fundamentals matter.

Both stocks and bonds, measured by ETFs such as SPY, AGG, and TLT, are all down year-to-date with losses ranging from 8% to 19%. The classic bad-weather diversifier, gold, is also down about 6%. Commodities and energy, which had been one of the only bright spots in 2022, have now lost steam in recent weeks, and weakened. If you look at ETFs as proxies for these markets such as USO, XLE, and PDBC, they have all peaked in early June and have lost ground since.

Put simply, it’s been hard to spot winners with staying power, and this earnings season will offer us another opportunity to assess the impact inflation and rising rates are having on companies’ bottom lines, and search for any signs of stability and growth – or confirmation of the ‘R’ word: recession.

Single-Stock ETFs Are in The House

In that backdrop, we’re digesting an entirely new type of ETF wrapper that has come to market: the single-stock fund. With now two issuers already in this space, and many more ETFs filed in this category, we are off to the races on a new genre of ETF investing.

The first set (from AXS) came mostly as bull and bear pairs of investor favorites like Tesla, Paypal, and Nike, offering varying levels of leverage and inverse performance depending on the stock. Innovator, known for the Defined Outcome ETFs, followed with a hedged single-stock play on Tesla, offering more of a buffered ride on the stock performance.

These new ETF types are about single-stock risk magnified – big risk for big potential return.  

For fans of diversification, which is one of the key ETF traits we love to boast about, this latest product innovation can be a bit of a head scratcher. But at the end of the day, these strategies are just another tool that ETF investor can employ tactically to express short-term views or to hedge other existing positions in a portfolio.

And like any other tools, they need to be implemented responsibly. Don’t invest and drive. Our friend Dave Nadig wrote an excellent piece detailing the math of these strategies, which is a must read if you are considering jumping into them.

Product innovation is exciting, and we’ll be watching this space with interest, looking to see how they are used and what impact they have in the overall ETF market, if any.

To quote Nadig, “For now, we have a handful of products tracking extremely liquid underlying securities with low assets. The sky is most assuredly not falling. But imagine if these products existed in several flavors for every stock in the S&P 500? What happens when a stock becomes a meme-darling, and the liquidity flows into the geared products out of proportion to the underlying stock? The short answer is, ‘more end-of-day volatility,’ and the long answer is, ‘who knows, it’s not like anyone expected Roaring Kitty to blow up GameStop’.”

No Better Time to Learn About Digital Assets

Talking about potential blow-ups, Bitcoin is down some 55% this year. Between those with perfect hindsight 20-20 vision and those with clear crystal balls, it seems as if everyone saw this coming, and everyone knows what happens next.

If you (like me) are not among those blessed with absolute clarity, education remains your trusted best friend. And given recent market action, there’s no better time to take the plunge and learn more about this space.

To that end, we have good news!

The ETF Think Tank has partnered with the Digital Assets Council for Financial Professionals to help you learn about crypto and get the DACFP Certificate in Blockchain and Digital Assets. DACFP has put together an impressive 11-module course on digital assets that offer 13 CE credits and a certificate that’s endorsed by the CFP Board among other groups.

If you are a financial advisor, and you want to grow your expertise in crypto assets, we may be able to sponsor your effort. To check out if you qualify for our sponsorship, scroll down our homepage to the DACFP link (looks like the image below), click on “Learn More” here, or give my colleague Dan Weiskopf a call. For more details on the Certificate, see the DACFP website.

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