While the markets are in a good place, it’s important to be prepared for changes. ETF Trends’ CIO and Director of Research, Dave Nadig, joined in on Yahoo Finance’s “ETF Report,” with host Melody Hahm, to go over the ways investors can look to protect themselves on the downside while still participating in areas generating gains.
Whether or not the popular themes are too expensive for investors, Nadig agrees that investors being cautious is a natural reaction. In 2020, there were so many products that use options to solve this issue. This included a launch from Simplify known as SPYC, which allowed for 98% of the money to go into the S&P 500, with put and call options helping to protect the investor and provide extra upside were the market to ramp up suddenly.
Additionally, Simply just released four new products targeted at micro themes such as electric cars, fintech, cloud computing. In each case, the funds have a concentrated portfolio and just a handful of companies, but the options are there to protect investors on the downside and help were the upside to come through.
“I think these are really interesting tools that help investors stay invested, but give you a little bit of comfort that you’re not going to get wiped out, should we have another pullback, as we did in March,” states Nadig.
“My personal belief is that things are going to be fairly steady and a little bit calmer,” @ETFtrends CIO @DaveNadig says about the market during the new administration. “If I’m looking two to three years out … I’m planning for a little bit lower volatility.” pic.twitter.com/X2SSDTayxS
— Yahoo Finance (@YahooFinance) December 29, 2020
While the approach has changed, there is still a feeling for investors to want to diversify their bets, hedge themselves, and get into fractional shares to some degree. When it comes to the risk tolerance young investors may have in this environment, Nadig feels the way to target these new products targeting small themes with concentrated portfolios is to realize they’re replacing single stocks.b
Nadig continues, “If you’re really bullish on the electric car business, for example, instead of just buying Tesla and hanging on for the ride, the opportunity here is to buy something like VCAR, which will give you that Tesla exposure, but also protect you a little on the downside, and give you the opportunity to do even better than the underlying stocks, should you be right and these themes really be driving the economy.”
That’s not Nadig suggesting that anyone should be using these funds as the core of their retirement portfolio. Really, these are more speculative and trading oriented products, which can prove to be quite interesting. It’s a new wave of products seen in ETFs around this strategy.
When looking at how the new administration may affect these micro themes, Nadig realizes there’s certainly a lot of curiosity and concern for investors. That said, he feels things will remain pretty steady, if not calmer. There are economic issues to be worked out through the system, but that’s why these downside protection vehicles have truly caught on.
For more market trends, visit ETF Trends.