Safer funds aka. Boomer Candy

[Chuckanut]

From today’s WSJ:

Retirees Gravitate To Funds Marketed As Safer

Baby boomers who aren’t ready to walk away from the stock market ar

wallstreetjournal-ny.newsmemory.com

Apparently, some retired people want more safety in their investments and are jumping into these funds. Is this a good idea or is this another “What Could Possibly Go Wrong” bombshell waiting to explode. I don’t know.

They’ve been nicknamed Boomer Candy by people who market them.

A few quotes from behind the paywall.

Even as signs of cooling inflation have powered major indexes to records, investors have poured billions of dollars into exchange-traded funds that use derivatives to produce extra dividend income or protect against losses.

Craig Morningstar, a 61year-old retired financial adviser in Scottsdale, Ariz., said he has 10% of his equity portfolio invested in buffered and “floored” funds that protect against a market downturn.

“For me, it’s a way to get higher returns than bonds over the long term, but have less volatility than being fully exposed,” Morningstar said. “I want money that I could pull from my equity holdings if something goes horribly wrong.”

But with the Nasdaq 100 up 37% over the past 12 months, buffer-fund investors have missed out on substantial returns.

Analysts said that is one of the significant trade-offs that come with derivative-based funds: Over the long run, stock-market returns are heavily influenced by outlier years of robust returns, and missing out can be damaging to an investor’s portfolio.

BlackRock offers eight ETFs focused on providing either downside protection or income through options, and the product line is in high demand, said Mark Alberici, head of product innovation and development at iShares, BlackRock’s ETF business. BlackRock has filed paperwork indicating it intends to soon launch funds with 100% downside protection.

 

[Qs Laptop]

I don't think it is a “What Could Possibly Go Wrong” bombshell waiting to explode. But it is a potential "let's take a dividend without regard to total return" strategy that is very common.

For total returns, would you be better off buying the underlying stock or buying the derivative that pays a dividend? It depends, but probably better off buying the underlying stock.

[Caveat: I'm not exactly sure what funds they are discussing, but here's my experience...]

I own a couple of these funds. It's TSLY which is a Tesla stock derivative. It currently pays an annualized dividend rate of 51%. With the price of TSLA stock gyrating, this has been a good move. (Disclosure: I own TSLA.)

Another one I own is JEPQ, which tracks QQQ. This one pays a yield of about 10% right now. With QQQ moving up in the past year, this has not been good from a total return standpoint, but has paid a nice monthly dividend. (Disclosure: I own QQQ.)

Plenty of people hang on to dead stocks like JNJ, ATT, VZ, BUD, KO, etc. for the dividend thinking they are great stocks. But if you look at the total return had you simply been in an index fund it's quite a wake up call.

This "what could possibly go wrong" bombshell has already exploded.

 

[Northforker]

Here is my list of 41 boomer candy ETF holdings, I'm slowly selling off individual stock holdings and moving the proceeds to these ETF's as well as keeping 50% of my portfolio in 2 year CD's with an average return of 5.15%. I know it is a long list, but it pays the bills. Currently my income stream is about 1/3 SS, 1/3 interest income from the CD's, and 1/3 dividends and distributions from the ETF's and stocks. I SWAN. I'm sure I'll here the "you can't beat S&P index fund". You also could have one lure in your tackle box and one club in your golf bag. What's the fun in that?

SMH
VANECK SEMICONDUCTOR ETF



FTEC
FIDELITY MSCI INFORMATION TECHNOLOGY INDEX ETF



QQQ
INVESCO QQQ TRUST



ITB
ISHARES U.S. HOME CONSTRUCTION ETF



VUG
VANGUARD GROWTH INDEX FUND ETF SHARES



AIRR
FIRST TRUST RBA AMERICAN INDUSTRIAL RENAISSANCETM ETF



XLG
INVESCO S&P 500 TOP 50 ETF



FDIS
FIDELITY MSCI CONSUMER DISCRETIONARY INDEX ETF



FDIS
FIDELITY MSCI CONSUMER DISCRETIONARY INDEX ETF



SPY
SPDR S&P 500 ETF TRUST



VV
VANGUARD LARGE-CAP INDEX FUND ETF SHARES



DGRW
D
WISDOMTREE U.S. QUALITY DIVIDEND GROWTH FUND



VTI
VANGUARD TOTAL STOCK MARKET INDEX FUND ETF SHARES



VIG
VANGUARD DIVIDEND APPRECIATION INDEX FUND ETF SHARES



SCHD
SCHWAB U.S. DIVIDEND EQUITY ETF



FIDU
FIDELITY MSCI INDUSTRIALS INDEX ETF



FNCL
FIDELITY MSCI FINANCIALS INDEX ETF



QDEF
FLEXSHARES QUALITY DIVIDEND DEFENSIVE INDEX FUND



VYM
VANGUARD HIGH DIVIDEND YIELD INDEX FUND ETF SHARES



XLU
THE UTILITIES SELECT SECTOR SPDR FUND



FSTA
FIDELITY MSCI CONSUMER STAPLES INDEX ETF



FMAT
FIDELITY MSCI MATERIALS INDEX ETF



HDV
ISHARES CORE HIGH DIVIDEND ETF



PPH
VANECK PHARMACEUTICAL ETF



MLPX
GLOBAL X MLP & ENERGY INFRASTRUCTURE ETF



SPHY
SPDR PORTFOLIO HIGH YIELD BOND ETF



VDE
VANGUARD ENERGY INDEX FUND ETF SHARES



QWLD
SPDR MSCI WORLD STRATEGICFACTORS ETF



DIVO
AMPLIFY CWP ENHANCED DIVIDEND INCOME ETF



CIBR
FIRST TRUST NASDAQ CYBERSECURITY ETF



FDVV
FIDELITY HIGH DIVIDEND ETF



DGRO
ISHARES CORE DIVIDEND GROWTH ETF



KNG
FT CBOE VEST S&P 500 DIVIDEND ARISTOCRATS TARGET INCOME ETF



JEPI
JPMORGAN EQUITY PREMIUM INCOME ETF



XLC
THE COMMUNICATION SERVICES SELECT SECTOR SPDR FUND



BBIN
D
JPMORGAN BETABUILDERS INTERNATIONAL EQUITY ETF



SPYD
SPDR PORTFOLIO S&P 500 HIGH DIVIDEND ETF



JEPQ
JPMORGAN NASDAQ EQUITY PREMIUM INCOME ETF



AIQ
GLOBAL X ARTIFICIAL INTELLIGENCE & TECHNOLOGY ETF



SPMO
INVESCO S&P 500 MOMENTUM ETF



FDVV
FIDELITY HIGH DIVIDEND ETF

 

[Qs Laptop]

Here is my list of 41 boomer candy ETF holdings, I'm slowly selling off individual stock holdings and moving the proceeds to these ETF's as well as keeping 50% of my portfolio in 2 year CD's with an average return of 5.15%.

I think the article is talking about certain ETF's that buy options as a hedge against losses and also to provide higher dividends, and not talking about conventional ETF's, which you have purchased.

I'm sure I'll here the "you can't beat S&P index fund". You also could have one lure in your tackle box and one club in your golf bag. What's the fun in that?

I like your analogy of only one lure in the tackle box. However, I think you have a lot of duplication here. Consider QQQ and XLG. XLG is an ETF containing the top 50 S&P500 stocks (Microsoft, Nvidia, Apple, Amazon, Meta, etc.) whereas QQQ has the top 100 NASDAQ stocks in it (Microsoft, Nvidia, Apple, Amazon, Meta, etc.) The end result is that the returns are very similar.

Furthermore, ETF's typically don't pay very high dividends. Take one of your holdings, VYM Vanguard High Dividend Yield Index Fund ETF, which pays an annual 2.85% dividend. Now compare that dividend to TSLY, which pays an annual dividend of 51%. Or even compare it to SCHD Schwab U.S. Dividend Equity ETF which pays an annual dividend of 4.85%. Simply having cash in a money market fund would have earned roughly 5% over the past year.

It seems you have a lot of index funds that could be winnowed down to perhaps 10 or even less, if only for simplicity. Remember, when you buy a total market index fund, half of the stocks in there are losers. Even if you buy an index with 100 stocks in it, there are plenty of losers.

To use your tackle box analogy, I have a couple dozen lures in my tackle box but why is it when I go fishing I only use 3 or 4 lures that have proven to be effective?

 

[Gumby]

I don't think it is a “What Could Possibly Go Wrong” bombshell waiting to explode. But it is a potential "let's take a dividend without regard to total return" strategy.....
Plenty of people hang on to dead stocks like JNJ, ATT, VZ, BUD, KO, etc. for the dividend thinking they are great stocks. But if you look at the total return had you simply been in an index fund it's quite a wake up call....

One argument for stocks like these in a taxable account is the favorable tax rates for QDIVs. If you want cash flow for spending, it's a substantial consideration.

 

[OldShooter]

... You also could have one lure in your tackle box and one club in your golf bag. What's the fun in that?

Interesting concept. It never occurred to me to design my portfolio in order to have fun. Maybe this will replace the "sleep well at night" criterion?

 

[Northforker]

Interesting concept. It never occurred to me to design my portfolio in order to have fun. Maybe this will replace the "sleep well at night" criterion?

My investment portfolio is equally weighted between fixed income and equities'. Equities comprise $810,000 and yield $38000 in distributions while my CD's and bonds comprise $800,000 and yield $35000 in interest. Additionally, the overall portfolio has grown $400,000 over the last 4 years after expenses with no withdrawals. My household expenses are paid from SS and after tax savings that is invested in short term CD's, the savings well will run dry in 36 months upon which the above income stream will take over the savings contribution. So, I am am having fun and sleeping well at night. Some people like to actively participate in their investments and some people like to use a very safe and passive approach with more predictable results, there is more than one way, and neither is necessarily wrong.

 

[Northforker]

I think the article is talking about certain ETF's that buy options as a hedge against losses and also to provide higher dividends, and not talking about conventional ETF's, which you have purchased.




I like your analogy of only one lure in the tackle box. However, I think you have a lot of duplication here. Consider QQQ and XLG. XLG is an ETF containing the top 50 S&P500 stocks (Microsoft, Nvidia, Apple, Amazon, Meta, etc.) whereas QQQ has the top 100 NASDAQ stocks in it (Microsoft, Nvidia, Apple, Amazon, Meta, etc.) The end result is that the returns are very similar.

AGREED, those ETF's are focused on growth and as you well know, the growth right now is confined to a pretty short list of companies, therefore ETF managers are piling into them.

Furthermore, ETF's typically don't pay very high dividends. Take one of your holdings, VYM Vanguard High Dividend Yield Index Fund ETF, which pays an annual 2.85% dividend. Now compare that dividend to TSLY, which pays an annual dividend of 51%. Or even compare it to SCHD Schwab U.S. Dividend Equity ETF which pays an annual dividend of 4.85%. Simply having cash in a money market fund would have earned roughly 5% over the past year.

These ETF's pay respectable distributions and have additional moderate growth.

JEPQ 8.83%, SPHY7.75%, JEPI 7.31%, KNG 7.15%, MLPX 4.82%, SPYD 4.52%, DIVO 4.50%, HDV 3.48%, SCHD 3.37%, BBIN 3.25%, XLU 3.15%, FDVV 3.01 %, VDE 3.00%, VYM 2.98%

It seems you have a lot of index funds that could be winnowed down to perhaps 10 or even less, if only for simplicity. Remember, when you buy a total market index fund, half of the stocks in there are losers. Even if you buy an index with 100 stocks in it, there are plenty of losers.

AGREED, I'm working on it.

To use your tackle box analogy, I have a couple dozen lures in my tackle box but why is it when I go fishing I only use 3 or 4 lures that have proven to be effective?

LOL, I crappie fish, I must have 500 different jig colors and shapes, I probably use 10 of them 90% of the time.