After a strong five months for the S&P 500 Index in 2024, many advisors thought the remainder of the year would be weaker. While taking profits might make sense to some, there’s a range of ETFs to consider helping clients stay in the market. As the adage. says, “Time in the market beats timing the market."
VettaFi hosted an Alternatives Symposium at the end of May with more than 400 attendees. In addition to sharing insights from leading asset managers, we asked them many questions. One was, “What are your expectations for the S&P 500 Index between now and year end?”
Some Bullish; Others Expect Flat-to-Down Equity Market
Most respondents (62%) expected the equity benchmark to be up more than 5% in the next seven months. However, a meaningful 38% believed stocks would be flat-to-down for the rest of 2024. The second group of advisors and clients are the ones that would most likely find alternatives appealing. They might also know of the market seasonality heading into the summer.
According to CFRA Research, the market has notably been weaker in the May-October period than it was during November-April in the last 70 years. But it’s not so weak as to indicate that investors “sell in May and go away,” yet it’s something to keep in mind.
Thus far in 2024, the most popular ETF has been the Vanguard S&P 500 ETF (VOO ), which simply provides broad market exposure to large-cap stocks. However, we have seen other strategies gain traction by limiting the equity downside. We recently discussed covered call ETFs, but there are other options-based ETFs.
Using Options to Limit Market Impact
The Innovator US Equity Power Buffer ETF- January (PJAN ) has added approximately $400 million in 2024, pushing its assets to $1.2 billion. The ETF protects against 15% losses for the S&P 500 in a one-year period in exchange for a 14% upside cap since the beginning of January. As of June 7, PJAN had approximately 6% upside potential remaining.
Innovator, as well as peers Allianz and First Trust, offer defined outcomes ETFs with 12-month periods that started more recently. Examples include the FT Vest US Equity ETF Buffer ETF – March (FMAR ) and the Allianz US Large Cap Buffer 20 – June (JUNW ).
Say He(l)o to an Active Approach
The JPMorgan Hedged Equity ETF (HELO ) launched in September 2023. The fund has added $550 million thus far in 2024, pushing the asset base to close to $800 million. The fund actively investors in U.S. large-cap stocks while employing a laddered options strategy to reduce downside risk. Management can add value through security selection as well as options activity.
Though the Fidelity Hedged Equity ETF (FHEQ ) launched only in April 2024, the ETF has $450 million in assets. Eric Granat, a derivatives analyst and portfolio manager at Fidelity, spoke about the differences between FHEQ and the firm’s income-focused covered call ETF strategy at the Alternatives Symposium.
“We want to use options to go after a broad set of risk appetites,” he explained. "The Fidelity Hedged Equity ETF is a purely contractual, defensive strategy.
Seeking Stronger Downside Protection
Matt Kaufman, head of ETFs at Calamos, also spoke at the Alternatives Symposium. One fund he spoke about, the Calamos S&P 500 Structured Alt Protection ETF – May (CPSM ), launched in May with 100% downside protection. The downside protection ETF quickly passed the $100 million mark. As of June 7, the $110 million CPSM had 97% downside protection and 7.0% capped upside available in the one-year period.
These ETFs are not expected to keep up with VOO during bullish times. However, for those concerned about the remainder of 2024, options-based ETFs can make sense.
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