A broad-market exchange traded fund that almost rids of volatility has been on the rise. And that comes at just the right time.
Investors are afraid that a winter wave of coronavirus infections could cause widespread lockdowns in the U.S. and even with monetary and fiscal stimulus flowing through the economy, the stock market would not exactly be void of hard times in that scenario. Plus, a Joe Biden Presidency -- and Biden leads in the polls -- would not be a pro business one. A blue wave in Congress could possibly send corporate taxes up to 28% from 21%, an immediate negative for earnings. Just Thursday, tech stocks began selling off massively, with the Nasdaq down as much as 4.6%. The incredible outperformance of growth verses value has sent tech stocks to levels investors were fearful of Thursday.
Enter the U.S. Large Cap Buffered Outcome ETF, offered by Allianz.
The fund is like an S&P 500 ETF, but it limits an investors downside to 10% within a 12 month period. The fund was launched in the third quarter of 2018.
Here's a quick explanation of how the fund works
"It's a fully liquid, transparent ETF that's traded on the New York Stock Exchange. It allows the individual investor to have upside participation in the market -- in this case 10 to 12%. What's unique and different is that you have some level of protection. It allows you to still capture a lot of that upside potential of the S&P 500, but do it with a level of protection and sort of that piece of mind that comes with having a risk mitigation solution," Corey Walther, Allianz Life Financial Services said.
The fund buys put options against the long positions, but as stock prices rise, it sells the put options and uses the proceeds to buy more puts should downside emerge. The first 10% of downside is also absorbed by Allianz, not the investors in the fund.
So why not buy this ETF instead of a regular S&P 500?
The downside is that if the S&P 500 rallies more than its upside buffer, the investors in the fund will miss out on those continued market gains.
Walther says millennials have been buyers of the product, which seems counterintuitive to traditional, textbook investment strategy. Young people are far away from retirement and can stomach volatility as stock prices almost always rise over periods of decades. But "this ETF helps millennial investors "get started" and "do it with a little bit of piece of mind that they can enter a market that has really roared back [from the pandemic-induced bear market]." Older investors closer to retirement have also been adopting the product.
As for now, Allianz is "absolutely seeing stronger inflows" of late, Walther said. "We are seeing smart and savvy investors use this as an opportunity to reposition their portfolio."
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