At Exchange: An ETF Experience 2022, Graham Day, vice president of product and research at Innovator ETFs, said that inflation and rising rates are the biggest challenges facing investors in 2022. And while geopolitical risks “tend to wane over shorter periods of time,” Day noted that “inflation can persist for years.”
“Historically, the Fed has been unable to create a soft landing for the economy when they’ve started to hike rates at this level of inflation,” Day said. “So, if you got inflation that’s eroding the bonds, if you’ve got recession risk that could potentially be bad for equities, people are looking for new ways to manage their risk.”
Because investors are seeking new ways to manage risk, Innovator’s suite of Buffer ETFs has “gained a lot of intention from advisors,” because they provide exposure to the equity markets, but have known buffers of, for example, 15% against market losses.
“So, it gives investors the peace of mind to be able to say, ‘Look. We’re going to stay invested, we’re not going to take interest rate risk, but we’re also not going to be fully exposed to market downside,’” Day told NYSE’s Judy Shaw for ETF Leaders, powered by the New York Stock Exchange. “So, that’s a new tool we’re seeing advisors implementing for their clients.”
“More Pain Ahead”
While “bonds had a bad 2021” and are “off to a bad start in 2022,” Day warned “there’s still more pain ahead.”
When the interview was conducted in April, Day forecast that the Fed was “going to have to be very tough on inflation,” and “raise rates more than… what a lot of people are expecting,” said Day. So far, he’s been proven right.
So, because fixed income was no longer defensive and the yields were still low, a lot of investors were asking their advisors for alternatives to fixed income. This is once again where Innovator’s Buffer funds can come into play. “They’re more of that hybrid solution being utilized as a way for investors to maintain a defensive posture but avoid the interest rate risk of bonds,” said Day.
“A Slow Grind”
Looking ahead to the rest of the year, Day believed that 2022 was “going to be a slow grind.”
“I think we’re going to have a lot of volatility,” he said. “I think there’s going to be bigger moves up and bigger moves down. I think this era of equity markets returning 15% to 20% a year are over. I think we’re in a period for lower growth, more volatility, and so because of that, I think people are going to want new tools to smooth that right out for their clients.”
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