Wall Street always appears to be able to come up with new ideas to satisfy the itch of investors of all types. Maybe the most notable example of that is in the ETF market. Based on data from Wall Street Horizon, there has never been a bigger four-quarter rolling total of new fund issuance among US ETF providers.
Over the previous four years, there has been a consistent rise in demand, which has been fueled by the need for single-stock funds, buffer (or defined-outcome) products, covered-call strategies, high-income exchange-traded funds, and the most recent wave of cryptocurrency plays. Naturally, tech and artificial intelligence-focused portfolios are still popular. Active ETFs are also capturing market share, according to recent data.
A Market Primed for Fund Increase
Yes, among investors of all risk levels, there are a few recurring motifs. Even though it’s not always a quick and easy procedure, ETF issuers may construct funds rather easily with today’s technology. Nevertheless, given the surge in equities markets since the beginning of the year and the recovery in the bond market, there may be more capital accessible than ever.
Not to mention, at the very moment that the US Federal Reserve is poised to start a potential cycle of interest rate reductions, there is over $6 trillion in cash in money market mutual funds. Overall, more significant ETF inflows in July suggest that this is maybe the best time ever to be an ETF issuer. Fees are a constant concern for today’s astute investors, though competition is fierce.
“Boomer Candy” in the Limelight
And the current ETF hot spot, high-income funds, is centered around the most seasoned investors. There is a growing number of exchange-traded funds (ETFs) that offer a high income with little risk. These goods are similar to adding a sweet treat to often boring portfolios, which is why Eric Balchunas called them “boomer candy.”
Critics argue that their high fees and complex structures may cause more problems than they are worth, whilst proponents argue that the appropriate portfolio is one that an investor can continue with through good and bad times, even if it comes at a higher cost.
It’s obvious that this new fund type is trendy, but we’ll leave that to the experts on exchange-traded funds. According to The Wall Street Journal and FactSet, $31 billion has been invested in boomer candy items in the previous 12 months as of June.
The Different Flavors
Certain of the most well-known boomer candy exchange-traded funds (ETFs) are easily understandable to seasoned investors and portfolio managers. The potential portfolio payout is increased by equity premium income methods, which typically purchase a basket of liquid large-cap equities and then sell options on those positions. The downside is that there is frequently some degree of upward limitation.
Another alleged ETF sweet treat is buffer funds, which claim to shield investors from losses up to a predetermined percentage on an index while limited potential gains. Once again, alternatives are used to create the reward profile.
Data suggest, however, that the higher the yield, the more likely the ETF will underperform the S&P 500. Of course, each ETF has its own benchmark, so investors must conduct their due diligence just like they would on a single stock.
The Popularity of Single-Stock ETFs
High-yield equities ETFs are becoming more and more popular, but not just among older investors. A new single-stock fund using a covered-call strategy to boost yield seems to be launched every day.
A couple of the most recent products are the YieldMax Short NVDA Option Income Strategy ETF (DIPS) and the YieldMax ABNB Option Income Strategy ETF (ABNY). These exchange-traded funds (ETFs) typically imitate a covered call strategy by constructing an allocation through derivatives, both from the long and short sides.
Although dividend yields above 30% are not unheard of, it is important to understand that they are not the same as the dividend yield on shares of a blue-chip stock. The high claimed yield comes from option-selling premium rather than from a corporation paying holders a percentage of its cash flows.
Crypto’s Coming of Age
In 2024, ETFs that track the performance of spot Bitcoin and Ether have also become extremely popular in the cryptocurrency space. Funds tracking the second-largest digital currency in the world started trading in late July after the US Security and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs in January.4.
Ether ETFs, including leveraged, short, and futures-based products, are currently traded by a large number of issuers. For investors looking for cryptocurrency diversification, we even have ETFs that will be exposed to both Bitcoin and Ether in the same portfolio.
More options for ordinary investors might be beneficial; the VettaFi Galaxy Crypto Mining Index, which tracks businesses that mine or stake cryptocurrency assets as well as those that offer hosting services for these activities, shows that investing in cryptocurrency-mining companies can be unsettling. Throughout the last year, the index’s total return has varied from 342 to over 1000.
The Bottom Line: ETFs now provide investors with more than just inexpensive, easy-to-understand index access. In response to the increasing demand from various investor types, new specialty strategies have gained significant traction.
While the list of funds employing options on individual stocks appears to be growing every week, high-yield equities ETFs have been around for a year. Additionally, as the cryptocurrency market develops, it’s becoming simpler than ever to participate in it due to affordable Bitcoin and Ether ETFs.
