These ETF strategies won big in 2023. How one analyst sees them doing next year.

Hello! This is MarketWatch reporter Isabel Wang bringing you this week’s ETF Wrap. In this week’s edition, we look at ETF strategies that have exploded in popularity in 2023, and whether they will continue to gain momentum in the year ahead.

Please send tips or feedback to [email protected] or to [email protected]. You can also follow me on X at @Isabelxwang and find Christine at @CIdzelis.

Sign up here for our weekly ETF Wrap.

U.S. exchange-traded funds have had a strong 2023, attracting around $580 billion in net inflows with assets climbing to a record $8.1 trillion as of December 27, according to FactSet data.

ETFs tracking the large-cap benchmark S&P 500 index
SPX,
which has risen 24.6% this year, have seen the strongest net inflows in 2023 among the nearly 700 funds MarketWatch tracks, according to FactSet data.

The SPDR S&P 500 ETF Trust
SPY,
the world’s largest and oldest ETF with $493 billion assets under management, has recorded the largest net inflows of over $47 billion this year to date, followed by the Vanguard S&P 500 ETF’s
VOO
$41 billion and the iShares Core S&P 500 ETF’s
IVV
$36 billion over the same period, according to FactSet data. 

In terms of year-to-date performance, technology-related stock funds have shown a remarkable turnaround in 2023 after facing a tumultuous bear market the year before. Some of the ETFs tracking the tech-heavy Nasdaq 100 index
NDX
as well as semiconductor stocks are on pace to finish 2023 with gains of more than 50%, thanks to the rise of the “Magnificent Seven” stocks.

The Fidelity Blue-Chip Growth ETF
FBCG
has jumped 58.7% in 2023 to become the best-performing U.S. fund, excluding ETNs and leveraged products, according to FactSet data. The WisdomTree U.S. Quality Growth Fund
QGRW
is up 56.2% this year, while the Invesco QQQ Trust Series I
QQQ
has risen 55.6% in 2023. Gains in all of these funds were fueled by a massive rally in mega-cap technology stocks such as Apple Inc.
AAPL,
+0.22%

and Nvidia Corp.
NVDA,
+0.21%
,
which have surged 49% and 239% this year, respectively, according to FactSet data. 

Will these ETF strategies continue to thrive in 2024? Will others emerge to deliver greater returns next year? Here’s how one CFRA ETF analyst sees things shaping up in the new year. 

Tech-driven growth ETFs will continue to stand out in 2024

The recent strong performance of technology and growth-driven ETFs is likely to continue in 2024, although with higher volatility, according to Aniket Ullal, senior vice president and head of ETF data and analytics at CFRA. 

The table below summarizes the best performing ETF sub-categories in 2023, excluding leveraged and inverse ETFs. The best ETF sectors have featured tech- and growth-related themes like fintech, cryptocurrency, semiconductors, software and the metaverse. “These themes are very likely to continue to have a strong year in 2024,” said Ullal.

SOURCE: CFRA ETF DATABASE, DATA AS OF DECEMBER 18, 2023

One concern for investors is whether ETFs linked to technology sectors can continue to appreciate in 2024. But CFRA’s analysts think that some of the largest tech firms have strong balance sheets and cash flows, so they should be “safe havens” with “a growth tilt” next year.

“Despite the AI-driven recent run-up, the tech sector is still growing into its multiple, and ETFs like the Technology Select Sector SPDR Fund
XLK
do not yet have frothy multiples,” Ullal said in a Friday client note. 

See: ‘Magnificent Seven’ up for another bull run? What to expect from technology stocks in 2024.

Meanwhile, the massive amounts of cash parked at U.S. money-market funds could also keep the bull-market rally chugging along next year.

As of December 20, there was still $5.9 trillion sitting in U.S. money-market funds, according to data compiled by the Investment Company Institute. But given the stock-market rally in 2023 and the “likely pivot” to interest-rate cuts next year by the Federal Reserve, Ullal and his team see investors moving money out of cash-like instruments and migrating back to 60/40 portfolios by increasing their equity exposure next year, he wrote. 

Continued growth in options-based ETFs

ETFs using options-based strategies, such as covered-call ETFs or defined-outcome ETFs, have exploded in popularity in 2023. They have “long-term staying power” in sustaining investor interest in the year ahead, said Ullal. 

Specifically, the largest U.S. covered-call ETF, the $31 billion JPMorgan Equity Premium Income ETF
JEPI,
has seen $13 billion in net inflows so far this year and is among the top-five funds attracting the most capital in 2023, according to FactSet data.

A covered-call ETF, or an option-income ETF, is a fund that uses an options strategy called covered-call writing to generate income through collecting premiums. In a covered-call trade, investors sell a call option on an asset they hold, which gives the buyer of the option the right, not the obligation, to purchase the asset from them at a specified “strike” price on or before a certain date.

When the price of the asset goes down and doesn’t reach the “strike” price before the expiration date, the call option will expire as buyers walk away, but investors could still keep the premium as their payout.

That’s why the covered-call strategy usually performs well in a sideways or choppy market environment, because investors will be compensated for giving up the upside in stocks with a higher options premium. 

More on covered-call ETF: This type of ETF is designed to hedge against volatility and help investors navigate a stormy stock market

Ullal attributed the growing popularity of options-based ETFs to the success of JEPI as well as ETF firms relentlessly expanding their covered-call and buffer-ETF suites in 2023, even though these strategies tend to underperform in a rapidly rising stock market. 

“The flows are probably moderate [in 2024] relative to what we’ve seen so far, but I don’t think the flows will be negative or this category will go away,” Ullal said in a follow-up interview with MarketWatch on Thursday. “What’s happening is there are investors who are willing to trade off or sacrifice some [stock] performance for income or downside protection.” 

With that backdrop, Ullal sees options-based ETF strategies continuing to grow in 2024, though they will be put to the test if the current bull-market trend continues. 

Also see: An ETF that can’t go down? This new ‘buffer’ fund is designed to provide 100% protection against stock-market losses

Emerging-markets ETFs without China-related drag

ETF investors may want to “unbundle” their emerging-market exposure by reconsidering China-related assets in their ETF portfolios, according to Ullal.

Having a high exposure to China in emerging-market holdings was challenging for ETF investors in 2023, as China significantly underperformed other emerging markets this year due to a slower-than-anticipated post-Covid economic recovery, weakness in the country’s property sector and geopolitical tensions with the U.S., Ullal said.

China exposure in two of the most popular emerging-market ETFs, the Vanguard FTSE Emerging Markets ETF
VWO
and the iShares Core MSCI Emerging Markets ETF
IEMG,
stands at 31% and 24.4%, respectively, according to FactSet data. In turn, VWO has risen 8.3% this year, while IEMG has climbed 10.7% in 2023.

Meanwhile, the SPDR S&P China ETF
GXC
has slumped 12.8% year to date, per FactSet data. But the iShares MSCI Emerging Markets ex China ETF
EMXC,
which has no China exposure, has advanced 18.9% over the same period.

One option for investors would be to calibrate their exposure by combining emerging-market ex-China ETFs like EMXC with China-focused ETFs, Ullal said.

Alternatively, investors could construct the EM sleeve of their portfolios with country-specific ETFs, or use active ETFs like the KraneShares Dynamic Emerging Markets Strategy ETF
KEM,
as that fund’s China exposure is dynamically adjusted based on fundamental, valuation, and technical signals, he added.

Rising demand and competition in active bond ETF category 

The U.S. fixed-income ETF sector is dominated by funds passively tracking Treasury bonds like the 10-year Treasury note
BX:TMUBMUSD10Y,
which has seen declining yields lately as discussions around the Fed’s interest-rate path, and a possible pivot to rate cuts, continue to take center stage heading into 2024.

But MarketWatch reported last week that demand for active bond ETFs has picked up, with Vanguard launching two new active bond funds earlier this month. The desire for active bond ETFs among the firm’s clients has grown significantly over the past two years, John Croke, Vanguard’s head of active fixed-income product management, told MarketWatch.

Meanwhile, the firms that dominate the indexed and active bond ETF categories are different, Ullal noted. In the indexed bond ETF category, Vanguard competes with traditional rivals BlackRock and State Street, while in the active bond ETF category where it is now expanding its footprint, Vanguard is competing with managers like JPMorgan, First Trust and PIMCO. 

“This competition will put pressure on the incumbent players, but will be good for investors, and will be an important trend to watch in the next year,” said Ullal.

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

Top Performers

%Performance

AdvisorShares Pure U.S. Cannabis ETF
MSOS
12.7

Amplify Transformational Data Sharing ETF
BLOK
10.5

SPDR S&P Biotech ETF
XBI
9.9

ARK Genomic Revolution ETF
ARKG
8.3

ARK Innovation ETF
ARKK
6.4

Source: FactSet data through Wednesday, Dec 27. Start date Dec 21. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater.

…and the bad

Bottom Performers

%Performance

iMGP DBi Managed Futures Strategy ETF
DBMF
-2.9

Vanguard Total International Bond ETF
BNDX
-2.2

iShares 20+ Year Treasury Bond BuyWrite Strategy ETF
TLTW
-2.1

VanEck BDC Income ETF
BIZD
-1.2

Vanguard Short-Term Inflation-Protected Securities ETF
VTIP
-1.2

Source: FactSet data

New ETFs

  • TCW Group filed to convert its TCW Artificial Intelligence Equity Fund TGFTX into the TCW Artificial Intelligence ETF, and is seeking to convert its TCW New America Premier Equities Fund TGUSX into the TCW Compounders ETF, according to the fund’s prospectus filed with the Securities and Exchange Commission on Tuesday.

Weekly ETF Reads



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Here’s where ETF investors could turn to hide as Treasurys sell-off upends U.S. stocks

Hello! This is MarketWatch reporter Isabel Wang bringing you this week’s ETF Wrap. In this week’s edition, we look at how ETF investors can navigate the choppy financial markets which remain on edge after a sell-off in U.S. government bonds drove long-term borrowing costs to the highest level in more than a decade, undercutting stock prices.

Sign up here for our weekly ETF Wrap.

A renewed rout in the U.S. government bond markets that sent the yield on the 10-year Treasury bond to 16-year highs as a new era of higher-for-longer interest rates takes hold, is leaving ETF investors scrambling for the exits on a wide range of exchange-traded funds in the past week, most notably the iShares 20+ Year Treasury Bond ETF
TLT.
 

TLT, one of the most popular fixed-income ETFs that tracks a market-weighted index of the U.S. Treasury bonds with maturities of 20 years or more, earlier this week suffered its lowest close since the early days of the 2007-2009 financial crisis. The yield on the 10-year Treasury 
BX:TMUBMUSD10Y
slipped 2 basis points to 4.715% on Thursday, after reaching 4.801% on Tuesday, its highest closing level since Aug. 8, 2007, according to Dow Jones Market Data.

See: Bond investors feel the heat as popular fixed-income ETF suffers lowest close since 2007

The bond market, particularly the U.S. Treasury market, has historically been less volatile and and has often performed better than other financial assets during economic slowdowns. However, that doesn’t mean bonds don’t come without their own risks.

Rising yields reflect a diminishing price for the securities when interest rates rise, and hit existing holders of Treasuries.

See: Rising Treasury yields are upsetting financial markets. Here’s why.

The surprising strength of the U.S. economy, as demonstrated by this week’s labor-market data, coupled with hawkish talk from Federal Reserve officials indicating the central bank may need to keep tightening monetary policy, have led to the bond sell-off this week.

Meanwhile, a positive Treasury term premium, or the compensation that investors require for the risk of holding a Treasury to maturity, have also contributed to a steep sell-off as a ballooning U.S. budget deficit and the Treasury’s need to issue more debt have pushed Treasury prices to 16-year lows.

TLT
TLT
has fallen over 50% since its peak in August 2020, according to FactSet data. The losses are “pretty much” what the equity-market loss was from peak to trough during the global financial crisis, said Tim Urbanowicz, head of research and investment strategy at Innovator ETFs. 

“It is not insignificant… It really makes you think about how you’re doing risk management because you can’t have the piece of the portfolio that’s supposed to be the risk mitigator falling the worst we’ve ever seen in the equity-market fall. That’s a big issue,” Urbanowicz told MarketWatch. 

That’s why ETF investors have very few options when developing or adjusting their asset allocation play in the higher-for-longer rates environment, but there are still some shockproof assets for safety, according to ETF strategists. 

Ultra short-term bond funds 

ETF investors that still favor bonds can consider hiding in ultra short-term bond funds to avoid duration risk as the Fed may still need to raise interest rates to curb inflation by the end of 2023, said Neena Mishra, director of ETF research at Zacks Investment Research. 

The SPDR Bloomberg 1-3 Month T-Bill ETF
BIL,
which tracks all publicly issued U.S. Treasury Bills that have a remaining maturity of less than 3 months and at least 1 month, offers a yield of 5.43%. The fund attracted over $1 billion of inflows in the week to Wednesday, the largest inflows among over 800 ETFs that MarketWatch tracked in the past week, according to FactSet data. 

Meanwhile, Mishra said investors who want active management with “better navigation to the markets” can consider the JPMorgan Ultra-Short Income ETF
JPST,
which is an actively managed fund that invests in a variety of debts including corporate issues, asset-backed securities, and mortgage-related debt as well as U.S. government and agency debt. JPST recorded $15 million of inflows in the past week and has yielded 5.76%, according to FactSet data. 

Flows into longer duration bonds, utilities sector

Despite the bond rout hitting the popular TLT fund hard as the 10-year Treasury yield surged, some retail traders have already started to buy the historic dip of the fund devoted to longer-dated Treasuries, said a team of Vanda Research data analysts led by Marco Iachini, senior vice president.

TLT attracted a total of $686 million flows in the week to Wednesday, ranking the 8th out of over 800 ETFs that MarketWatch tracked in the past week, according to FactSet data. 

Along with the strong “dip buying” in TLT, retail traders have also poured an “unprecedented amount” of capital into the utilities sector, Iachini and his team said in a Thursday note. The Utilities Select Sector SPDR Fund
XLU
recorded $141 million of inflows last week, according to FactSet data. 

“While purchases of utilities stocks are typically of a significantly smaller scale than purchases of tech stocks, the inflow seen over the past week is far larger than any other prior 5-day stretch, easily surpassing inflows into the sector at the onset of the Covid downturn,” the Vanda team said. “The flip side of this dynamic is that institutional investors have likely lightened up their utilities exposure during this bond sell-off episode, making the sector a potentially more appealing equity bet should rates be nearing a local peak.” 

See: Utilities stocks ‘decimated’ by rising rates fall into uncommon trading territory, Bespoke chart shows

Small-caps are ‘cheap for a reason,’ so don’t buy them too soon

Many small-cap stocks have traded at a significant discount to their larger-company counterparts, creating an attractive entry point for some investors who think the forward price-earnings ratio for small-caps are low enough to offer potential for outperformance in the longer run. 

However, small caps
IWM
are by nature more sensitive to higher interest rates compared with a lot of the larger-cap stocks which have the ability to be “nimble” with strong cash flow, said Urbanowicz.

“It is really important right now not to just rely on a specific sector but really have that built-in risk management at the index level to take a lot of that guesswork out of the equation,” he added.

See: Small-cap ETFs may look attractive as recession concerns fade, but blindly chasing the rally is not without risk

Defined-outcome ETFs

That’s why Urbanowicz and his team at Innovator ETFs think the increasingly popular defined-outcome ETFs, or the “buffer” funds, could limit the downside risk and help investors navigate a stormy rates environment.

See: An ETF that can’t go down? This new ‘buffer’ fund is designed to provide 100% protection against stock-market losses

For example, the Innovator Equity Defined Protection ETF
TJUL,
the “first-of-its-kind” fund, aims to offer investors the upside return of the SPDR S&P 500 ETF Trust
SPY
to a 16.62% cap, as well as a complete buffer against its downside over a two-year outcome period. 

Meanwhile, the Innovator Defined Wealth Shield ETF
BALT
offers a 20% downside buffer on the SPY every three months, which is a “very shortened outcome period” and doesn’t require the equity market to actually go up for the strategy to appreciate a value, Urbanowicz said. 

“A big reason [to consider this strategy] is it gives investors a place to not only maintain equity exposure, but also to hide out because they [funds] have known levels of risk management that are in place,” he added. 

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

Top performers

%Performance

YieldMax TSLA Option Income Strategy ETF
TSLY
6.2

United States Natural Gas Fund LP
UNG
2.0

Quadratic Interest Rate Volatility & Inflation Hedge ETF
IVOL
1.6

Technology Select Sector SPDR Fund
XLK
0.9

ProShares Bitcoin Strategy ETF
BITO
0.9

Source: FactSet data through Wednesday, October 4. Start date September 28. Excludes ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater.

…and the bad

Bottom performers

%Performance

AdvisorShares Pure U.S. Cannabis ETF
MSOS
-11.3

Sprott Uranium Miners ETF
URNM
-10.6

Global X Uranium ETF
URA
-10.2

VanEck Oil Services ETF
OIH
-9.2

SPDR S&P Oil & Gas Exploration & Production ETF
XOP
-9.1

Source: FactSet data

New ETFs

  • J.P. Morgan Asset Management Friday announced the launch of a new actively managed hedged equity ETF, JPMorgan Hedged Equity Laddered Overlay ETF
    HELO.
    The outcome-oriented ETF invests in U.S. large-cap equities with a laddered options overlay designed to provide downside hedging relative to traditional equity strategies.

  • Zacks Investment Management Tuesday announced the launch of the Zacks Small and Mid Cap ETF
    SMIZ,
    which seeks to generate positive risk-adjusted returns by investing in small and mid-cap companies.

  • Calamos Investments LLC Wednesday announced the launch of the Calamos Convertible Equity Alternative ETF
    CVRT,
     the first product of its kind to provide ETF investors with targeted access to equity-sensitive convertibles.

Weekly ETF Reads

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You can still run with the stock market’s bulls, but watch the exits

The stock market, as measured by the S&P 500 Index
SPX,
-0.64%

), has been moving upward. The U.S. benchmark index is essentially crawling up the higher “modified Bollinger Bands” (mBB), which is a bit of an overbought condition, but not a sell signal.

The next major resistance appears to be in the 4650 area, which at one time seemed far away but is now within range. There is minor support at 4527 (last week’s lows), with stronger support below that, at 4440, 4385, 4330 and 4200. Given the strong upward momentum of the market, a couple of those could be violated without giving the bull market any problem, but a fall below 4330 would be a game changer.

The S&P 500 has recently closed above the +4σ mBB, which sets up a “classic” sell signal. That “classic” signal was generated on Thursday when SPX closed below the +3σ Band — 4560. But we do not trade the “classic” signals, preferring to wait for the further confirmation of a McMillan Volatility Band (MVB) signal. Just because a “classic” sell signal has occurred does not mean that a MVB sell signal will automatically follow. We will keep you up to date on these developments weekly.

Equity-only put-call ratios have continued to edge lower as stocks have risen. This means that the put-call ratios are still on buy signals, but they are in deeply overbought territory because they are so low on their charts. The computer programs that we use to analyze these charts are once again warning of a sell signal, but we prefer to wait until we can visibly see the ratios begin to rise before taking on any negative position based on these ratios. Despite the fact that these ratios are at lows for the last year or so, it should be noted that they were much lower all during the 2021, as that bull market was pressing forward, and eventually gave way to a bear market.

Market breadth has been generally positive. Both breadth oscillators are on buy signals and are in overbought territory. They could withstand a day or two of negative breadth and still remain on those buy signals. Perhaps more importantly, cumulative volume breadth (CVB) is approaching what could be a major buy signal. If CVB makes a new all-time high, then SPX will follow. CVB is within just a small distance of its all-time high and could attain that today. Doing so would mean that an upside target of 4800+ would be in force for SPX.

New Highs on the NYSE continue to dominate New Lows, so this indicator remains strongly positive for stocks.

VIX
VIX,
+9.25%

is languishing between 13 and 14. As long as this continues, stocks can rise. The only time problems would surface would be if VIX spurted higher. So far, that hasn’t happened. It appears that “big money” still has some fear of this market, so they are buying SPX puts, keeping VIX a bit elevated. It should also be noted that VIX normally makes its annual low in July and begins to rise in August. So that is a potentially negative seasonal factor on the horizon.

The construct of volatility derivatives remains bullish for stocks, since the term structures of both the VIX futures and of the CBOE Volatility Indices continue to slope upwards.

Overall, we are maintaining our “core” bullish position because of the bullish SPX chart. We are raising trailing stops and rolling deeply in-the-money calls upward as we go along. Eventually, we will trade other confirmed signals around that “core” position.

New recommendation: Potential CVB buy signal

We made this recommendation last week and recommended using the cumulative total of daily NYSE advancing volume minus declining volume as a guide. That cumulative total did reach our projected value as of July 26. In reality, the “stocks only” CVB ended just shy of a new all-time high. We are going ahead with the recommendation, since the way that we stated it last week did generate the buy signal.

Buy 4 SPY Sept (29th) 480 calls: Since CVB reached a new all-time high, we are going to buy SPY
SPY,
-0.66%

calls with a striking price equal to SPY’s all-time high. We will hold without a stop initially.

New Recommendation: Emerging markets ETF (EEM)

There has been a high-level buy signal generated from the weighted put-call ratio for the Emerging Markets ETF
EEM,
-1.23%
.
Put buying has been extremely strong for more than a month and is now is abating. This has generated the buy signal.

Buy 5 EEM Oct (20th) 41 calls in line with the market

We will hold these calls as long as the EEM weighted put-call ratio remains on a buy signal.

Follow-up action: 

We are using a “standard” rolling procedure for our SPY spreads: in any vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be roll up in the case of a call bull spread, or roll down in the case of a bear put spread. Stay in the same expiration and keep the distance between the strikes the same unless otherwise instructed. 

Long 800 KOPN: 
KOPN,
-4.76%

The stop remains at 1.70.

Long 2 SPY Aug (4th) 453 calls: This is our “core” bullish position. The calls have been rolled up three times. Stop out of this trade if SPX closes below 4330. Roll up every time your long SPY option is at least 6 points in-the-money.

Long 1 SPY Aug (4th) 453 call: Bought in line with the “New Highs vs. New Lows” buy signal. The calls have been rolled up three times. Stop out of this trade if, on the NYSE, New Lows outnumber New Highs for two consecutive days. Roll up every time your long SPY option is at least 6 points in-the-money.

Long 2 PFG Aug (18th) 80 calls: This position has been was rolled up twice. We will hold this PFG
PFG,
-1.07%

position as long as the weighted put-call ratio remains on a buy signal.

Long 10 VTRS
VTRS,
-1.43%

August (18th) 10 calls: The stop remains at 10.15. 

Long 5 CCL
CCL,
+3.23%

Aug (18th) 17 calls: Raise the stop to 17.10.

Long 2 PRU
PRU,
-0.46%

Aug (18th) 87.5 calls: We will continue to hold these calls as long as the weighted put-call ratio remains on a buy signal.

Long 8 CRON
CRON,
-1.66%

Aug (18th) 2 calls: Hold these calls without a stop while takeover rumors play out.

Long 6 ORIC
ORIC,
-9.06%

Aug (18th) 7.5 calls: The stop remains at 7.40.

Long 2 EW
EW,
-9.78%

Aug (18th) 95 puts: Continue to hold these puts as long as the weighted put-call ratio remains on a sell signal.

All stops are mental closing stops unless otherwise noted.

Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of the best-selling book, Options as a Strategic Investment. www.optionstrategist.com

©McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. The information in this newsletter has been carefully compiled from sources believed to be reliable, but accuracy and completeness are not guaranteed. The officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may have positions in the securities recommended in the advisory. 

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‘I’m 62 and ready for my golden years’: I’ve $1.7 million in annuities, Roths and index funds. Can I afford to never work again?

I’m going to preface this by saying that I know I am in a great long-term position. It’s the short term that is of concern.

I am 62, single with no dependents. I own my smallish home outright and it’s worth $1 million due to the location. I own my car outright and I have no debt. My IRA and small Roth accounts have about $350,000 with an additional $840,000 in two guaranteed-income deferred annuities rolled over from a couple old 401(k)s in 2020. There’s $520,000 in my regular brokerage accounts (mostly Vanguard Index funds). I have $42,000 invested in two eReits and $10,000 in Series I Bonds. I have $71,000 in a higher-yield savings account and $12,000 in a checking account.

I had always planned to retire at 65 and live off my savings until filing for SSI between 67 and 70 (approx $3,400 to $4,100, depending on when I file). A year ago at 61, I abruptly quit a good-paying new job due to a bad work environment, and a week later, my elderly parent had a serious medical issue. I decided to take time off to help navigate care, and just be present — without all of the stress of a pretty demanding job. A year after quitting, I figured out that I have no desire to go back to what I was doing and, quite frankly, have to desire to work at all! 

‘I’m not afraid of running out of money long term. It’s the next 5 to 7 years that are really causing me heartache.’

So here (finally) is my concern. My expenses are at least $3,000 per month give or take. Given what I have in savings and no plans to file for Social Security Insurance for at least five years, what do I continue to live on, especially if I don’t go back to work? I most likely have some house expenses (new roof, garage door, etc.) in the near future, plus, I want to travel sooner than later so $71,000 won’t last that long especially with this inflation. Do I sell off some of my mutual fund shares to boost my savings? 

At some point (most likely in the next two years) there may be about $75,000 of inheritance, but I’m not factoring that into the equation for now. I think I’ve done almost everything right, and I’m ready for my golden years. I’m not afraid of running out of money long term. It’s the next five to seven years that are really causing me heartache. What are your thoughts?

Short-term Angst

Dear Angst,

Life is short, but we all hope for a long retirement, and it’s easy to lose sight of what’s important when we are “nose-down” in the rat race. We only have one life, and most of us, if we’re lucky, have two parents and/or sometimes one good parent. If we are blessed with one or both, it’s a gift if we can afford to take that time with them, especially if they have pressing medical issues. Thankfully, you had planned ahead, and you were able to do just that.

Many people reevaluated their relationship to work in recent years. You did so because you became a caretaker. The most fortunate among American workers were allowed to work from home from 2020, and where their work was the umbrella that protected their financial life and gave them the funds to live their life, by the end of the pandemic, that umbrella became their life which gave them the ability to work. It’s a profound change.

I’m going to take a wild guess here — well, not so wild — and say that a lot of people are reading your letter with their mouths agape, with not a small amount of envy. Some may see a touch of humble bragging to your financial achievements, but you acknowledge that you are in a healthy financial position, and have endeavored to do everything right. That, I’m sure, involved sacrifices along the way. So bravo to you. From a gratitude point of view, your financial list is a good one.

There are a couple of wrinkles, which may be useful for others to be aware of. Robert Seltzer, founder of Seltzer Business Management in Los Angeles, said he would not recommend a client to roll their 401(k)s into annuities due to their higher fees and lack of flexibility. Without working, your only taxable income would be derived from retirement account distributions and investment income — but if your taxable income is less than $41,675, therefore, you would pay no capital gains tax. 

Is it a good time to liquidate some stocks? You’ve played the long game. The S&P 500
SPX,
-0.29%

is up 2.7% over the past year; many people close to retirement have been spooked by stock-market volatility since 2020, but the S&P has increased more than 30% since the last trading session of 2019 — before the pandemic. Assuming you’ve been investing for the past three decades or more, and have experienced the miracle of compounding over that time, the time to enjoy your life is nigh. 

‘Assuming you’ve been investing for the past three decades or more, and have experienced the miracle of compounding over that time, the time to enjoy your life is nigh. ‘


— The Moneyist

Something to consider as you age: “As you transition from the accumulation stage of life to the distribution stage, it is important to recognize that your risk tolerance is changing,” says Mel Casey, a senior portfolio manager at FBB Capital Partners. “If the brokerage account index funds are all in stock funds, this should be addressed. A rebalancing over time to reduce stocks and increase bonds may lower the risk and prepare the account for eventual distributions.”

Meet with a financial adviser and work out your short- and long-term needs: what your income looks like before and after you tap your Social Security benefits. The good news is you have a healthy income awaiting you when you finally start drawing down money from your retirement accounts. It helps enormously that you have paid off your home — property taxes, insurance, food prices, car payments, gas, health insurance, etc. notwithstanding.

About that health insurance. No doubt you are already aware that this will be an extra expense before you qualify for Medicare at age 65. The average annual health-insurance premium for 2022 was $7,911 for single coverage, up slightly from $7,739 in the prior year, according to KFF, formerly known as the Kaiser Family Foundation, a nonprofit headquartered in San Francisco, Calif. (You can read more about signing up for Medicare and what it will cost here.)

Casey also has thoughts on healthcare costs as you get older. “You have three years until you can apply for Medicare and that will be an important time in terms of choosing the appropriate path,” he says. “In the meantime, some form of health insurance is advisable, if only to eliminate the ‘tail risk’ of a serious injury or illness which could erode this healthy savings very quickly.”

Withdrawing money for retirement

You could cover a substantial part of your expenses from your brokerage account and Roths ($870,000) or annuities ($840,000). While you have done a great job in growing long-term assets, there are relatively few liquid, short-term assets (emergency reserves), says Randall Watsek, financial adviser with Raymond James. “For someone in retirement without earned income to draw on for living expenses, having at least five years of reserves might greatly lower their stress level,” he adds.

Ideally, you want to take Social Security between 67 and 70. “From an average life expectancy basis, it works out roughly the same, whether you take Social Security at 62 or 70,” Watsek says. “You get more small payments if you take it earlier, or fewer large payments if you take it later. It makes most sense to delay Social Security if you have a family history of living into your 90s or 100s or if you’re still working.”

But if your parents have a history of living a long life, and you currently have good health, Seltzer said he would be open for more discussion about what age you should start claiming Social Security, and he would explore whether you are comfortable waiting until you reach 67 or 70 years of age. (This would warrant further discussion with your own financial adviser, and you can reevaluate your position every 12 months.)

As my colleague Alessandra Malito points out, help comes in many forms: financial consultant, wealth manager and investment adviser. Choose a fiduciary who is required to act in your best interests (rather than giving you advice with one eye on your needs and another eye on their commissions). In order to become a certified financial planner or CFP, you must complete a certificate or degree program, 6,000 hours of related experience and have passed an exam. 

“Broker-dealers are advisers who primarily sell securities and often charge commissions on their recommendations. Commissions aren’t inherently bad, but clients should understand what they’re being charged for and feel comfortable with those fees before proceeding with the advice,” Malito writes. Certified public accountants, chartered life underwriters, certified employee benefit specialists respectively deal with accounting, life insurance and benefits.

“The rule of thumb for taking distributions during retirement is 4%,” Seltzer added. “If you took a very conservative distribution rate of 3%, it would amount to $52,500 which is almost 50% higher than your expenses of $36,000. So, by living off of a mix of savings, distributions from the annuities and capital gains from your brokerage account, you should meet his cash-flow needs with paying very little tax.”

You’re doing just fine. Your $75,000 inheritance will also give you some freedom for the next year or two, and help you get over the finish line. If you travel, think about Airbnb-ing
ABNB,
+1.69%

your home, which would cover your accommodation costs. It may also encourage you to try living in a place for a month or more. As a cardiologist might tell a patient when they’re putting them on medication for the first time, “Start low, go slow.” Take your time. Don’t make any big decisions.

As one member of the Facebook
META,
-0.50%

Moneyist Group said, “If you’re a man please marry me!” I’ll leave that with you with God’s and your fiduciary’s blessings.

“Assuming you’ve been investing for the last three decades or more, and have experienced the miracle of compounding over that time, the time to enjoy your life is nigh.”


MarketWatch illustration

Readers write to me with all sorts of dilemmas. 

You can email The Moneyist with any financial and ethical questions related to coronavirus at [email protected], and follow Quentin Fottrell on Twitter.

By emailing your questions, you agree to have them published anonymously on MarketWatch. By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.

Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

The Moneyist regrets he cannot reply to questions individually.

More from Quentin Fottrell: 

‘He’s content living paycheck to paycheck’: My husband won’t work or get a driver’s license. Now things have gotten even worse.

My wife wants us to spend $5,000 to attend her cousin’s destination wedding. I don’t want to go. Am I being selfish?

‘I feel used’: My partner stays with me 5 nights a week, even though he owns his own home. Should he pay for utilities and food? 



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This once popular ETF used to hedge against inflation is now out of favor. What investors are doing now.

Hello! This is markets reporter Isabel Wang bringing you this week’s ETF Wrap. In this week’s edition, we take a look at inflation-protected bond ETFs. They saw significant outflows in the past week as U.S. consumer prices showed signs of moderating in April, though inflation pressures continued to squeeze Americans’ pocketbooks. 

Please send tips, or feedback, to [email protected] or to [email protected]. You can also follow me on Twitter at @Isabelxwang and find Christine at @CIdzelis.

Sign up here for our weekly ETF Wrap.

The iShares TIPS Bond ETF
TIP,
+0.22%
,
which tracks an index of Treasury inflation-protected securities, or TIPS, has seen outflows of nearly $340 million over the past week. Outflows on Wednesday alone exceeded $100 million following the release of a widely followed inflation report, according to FactSet data. 

The U.S. Consumer Price Index report Wednesday showed inflation cooled to the lowest annual rate in two years, but it still remained about more than double the prepandemic average and well above the Federal Reserve’s 2% target rate. 

CPI rose 0.4% in April from the previous month, much faster than the 0.1% increase recorded in March. Prices climbed 4.9% on a year-over-year basis, down from 5% in March. Excluding volatile food and energy categories, the core CPI rose 0.4% monthly and 5.5% from a year ago, both in line with expectations.

Todd Rosenbluth, head of research at VettaFi, said the outflows indicate that investors are responding to inflationary data, and they continue to “be nervous about having exposure to TIPS products.” 

TIPS are a type of Treasury security issued by the U.S. government, which are indexed to inflation to protect investors from a decline in the purchasing power of their money. Unlike other Treasury securities where the principal is fixed, the principal value of a TIPS adjusts with movements in inflation. When it matures, investors get either the inflation-adjusted price or the original principal, whichever is greater. 

“Investors have been racing into TIPS ETFs in 2021 in anticipation of higher inflation, and then they’ve been paring back that exposure ever since,” Rosenbluth told MarketWatch in a phone interview on Thursday. 

“The CPI numbers that came out show that inflation is still here to stay in perhaps different ways than people had been expecting…Now I think there are some mixed signals as to whether or not there are more hikes to occur,” he said. 

Market participants hope that the lower-than-expected inflation data may leave room for the central bank to refrain from raising interest rates further at its June meeting. They also placed a 42% chance that policy makers would begin to trim borrowing costs at their July 25-26 meeting, according to CME FedWatch Tool

There is “certainly a risk” for investors who pulled their money out of the inflation-linked bond ETFs to overestimate the disinflationary process and position for the price pressures to fall back to prepandemic levels, warned Tim Urbanowicz, head of research and investment strategy at Innovator ETFs. 

“The risk to see additional hikes probably outweighs the probability that you’re going to see cuts this year,” said Urbanowicz. 

See: ‘The Fed is way late and they’ve already screwed it up.’ This stock strategist is banking on gold, silver and Treasurys to weather a recession.

The divergence between the Fed and the financial markets has driven investors to move back to fixed-income ETFs, especially ultra short-term bond funds. Avoiding interest-rate volatility has replaced inflation protection to be at the forefront of investors’ playbooks, said market strategists.

The SPDR Bloomberg 1-3 Month T-bill ETF
BIL,
+0.07%

has seen over $86 million of inflows in the week to Wednesday, while the inflows over the past three months totaled nearly $5.3 billion. The iShares 0-3 Month Treasury Bond ETF
SGOV,
+0.06%

has recorded a total of $3.9 billion inflows over the same three-month period, according to FactSet data. 

“There is a lot of gravitation towards yield products,” said Urbanowicz. “The flows that we’re seeing on the shorter end of the yield curve continue to be prominent. Also other yield enhancement strategies are becoming extremely popular…as a way to really generate extra income.”

“Inflation was a fear for investors in prior years, and then sentiment has shifted towards interest-rate hikes and interest-rate sensitivity,” said Rosenbluth. “Investors want to manage their interest-rate sensitivity, and in particular, still have a focus on Treasury ETFs given the debt-ceiling crisis, and given what’s going on with inflation.” 

Another example is BondBloxx Bloomberg One Year Target Duration U.S. Treasury ETF
XONE,
+0.04%
,
which made its debut in September 2022. The fund has attracted over $514 million of inflows in the past week, and is among the top five ETFs that gathered maximum capital in the week to Wednesday, per FactSet data. 

“It’s rare to see an ETF that new get that level of demand,” said Rosenbluth. 

As usual, here’s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.

The good…

Top Performers

%Performance

Sprott Uranium Miners ETF
URNM,
-3.18%
9.3

ARK Innovation ETF
ARKK,
+0.18%
8.5

Global X Cybersecurity ETF
BUG,
-0.57%
8.3

VanEck Rare Earth/Strategic Metals ETF
REMX,
+0.12%
8.1

Global X Uranium ETF
URA,
-3.29%
8.0

Source: FactSet data through Wednesday, May 10. Start date May 4. Excludes ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater.

…and the bad

New ETFs

  • IndexIQ announced on Wednesday the launch of the IQ CBRE Real Assets ETF
    IQRA,
    -1.06%
    ,
    an actively managed ETF across real estate and infrastructure equity securities, subadvised by CBRE Investment Management Listed Real Assets LLC.

  • PIMCO said Wednesday that it launched the PIMCO Commodity Strategy Active ETF, which invests in a range of commodity-linked instruments and seek out “diverse sources of excess returns” by incorporating multifactor considerations such as storage costs of physical commodities and historic performance trends.

  • J.P. Morgan Asset Management on Thursday announced the launch of two new ETFs: JPMorgan BetaBuilders Emerging Markets Equity ETF
    BBEM,

    and JPMorgan BetaBuilders U.S. TIPS 0-5 Year ETF
    BBIP,
    -0.16%
    .
    BBEM seeks investment results that closely correspond to the performance of the Morningstar Emerging Markets Target Market Exposure Index SM, while BBIP tracks the performance of the ICE 0-5 Year U.S. Inflation-Linked Treasury Index.

Weekly ETF reads



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Big bank earnings in spotlight following historic failures: ‘Every income statement line item is in flux’.

JPMorgan Chase & Co.
JPM,
-0.11%
,
Citigroup Inc.
C,
+0.20%

and Wells Fargo & Co.
WFC,
+2.74%

— along with PNC Financial Services Group Inc.
PNC,
+0.37%

and BlackRock Inc.
BLK,
+0.05%

— report earnings Friday as Wall Street’s fixation on a recession continues to run deep. And following the implosion of Silicon Valley Bank
SIVBQ,
-12.21%
,
Signature Bank
SBNY,
+3.97%

and Silvergate Bank
SI,
-2.72%
,
along with efforts to seal up cracks in First Republic Bank
FRC,
+4.39%

and Credit Suisse Group AG
CS,
+1.27%
,
Wall Street is likely to review quarterly numbers from the industry with a magnifying glass.

“Every income statement line item is in flux and the degree of confidence in our forecast is lower as the probability of a sharper slowdown increases,” Morgan Stanley analyst Betsy Graseck said in a note on Wednesday.

For more: Banks on the line for deposit flows and margin pressure as they reel from banking crisis

She said that the collapse of Silicon Valley Bank and Signature Bank last month would trigger an “accelerated bid” for customers’ money, potentially weighing on net interest margins, a profitability gauge measuring what banks make on interest from loans and what they pay out to depositors. Tighter lending standards, she said, would drive up net charge-offs — a measure of debt unlikely to be repaid — as borrowers run into more trouble obtaining or refinancing loans.

Phil Orlando, chief investment strategist at Federated Hermes, said in an interview that tighter lending standards could constrain lending volume. He also said that banks were likely to set aside more money to cover loans that go bad, as managers grow more conservative and try to gauge what exposure they have to different types of borrowers.

“To a significant degree, they have to say, what percentage of our companies are tech companies? What percentage are financial companies? Do we think that this starts to dribble into the auto industry?” he said. “Every bank is going to be different in terms of what their portfolio of business looks like.”

He also said that last month’s bank failures could spur more customers to open up multiple accounts at different banks, following bigger concerns about what would happen to the money in a bank account that exceeded the $250,000 limit covered by the FDIC. But as the recent banking disturbances trigger Lehman flashbacks, he said that the recent banking failures were the result of poor management and insufficient risk controls specific to those financial firms.

“COVID was something that affected everyone, universally, not just the banking companies but the entire economy, the entire stock market,” he said. “You go back to the global financial crisis in the ’07-’09 period, that’s something that really affected all of the financial service companies. I don’t think that’s what we’re dealing with here.”

Also read: Banking sector’s growing political might could blunt reform in wake of SVB failure, experts warn

JPMorgan
JPM,
-0.11%

Chief Executive Jamie Dimon has said that Trump-era banking deregulation didn’t cause those bank failures. But in his annual letter to shareholders last week, he also said that the current turmoil in the bank system is not over. However, he also said that the collapse or near-collapse of Silicon Valley Bank and its peers “are nothing like what occurred during the 2008 global financial crisis.”

“Regarding the current disruption in the U.S. banking system, most of the risks were hiding in plain sight,” Dimon said. “Interest rate exposure, the fair value of held-to-maturity (HTM) portfolios and the amount of SVB’s uninsured deposits were always known — both to regulators and the marketplace.”

“The unknown risk was that SVB’s over 35,000 corporate clients – and activity within them – were controlled by a small number of venture capital companies and moved their deposits in lockstep,” Dimon continued. “It is unlikely that any recent change in regulatory requirements would have made a difference in what followed.”

The Federal Reserve’s decision to raise interest rates, along with a broader pullback in digital demand following the first two years of the pandemic, stanched the flow of tech-industry funding into Silicon Valley bank and caused the value of its bond investments to fall.

Don’t miss: An earnings recession seems inevitable, but it might not last long

But the impact of those higher interest rates — an effort to slow the economy and, by extension, bring inflation down — will be felt elsewhere. First-quarter earnings are expected to decline 6.8% for S&P 500 index components overall, according to FactSet. That would be the first decline since the second quarter of 2020, when the pandemic had just begun to send the economy into a tailspin.

“In a word, earnings for the first quarter are going to be poor,” Orlando said.

This week in earnings

For the week ahead, 11 S&P 500
SPX,
+0.36%

components, and two from the Dow Jones Industrial Average
DJIA,
+0.01%
,
will report first-quarter results. Outside of the banks, health-insurance giant UnitedHealth Group
UNH,
+0.70%

reports during the week. Online fashion marketplace Rent the Runway Inc.
RENT,
+3.75%

will also report.

The call to put on your calendar

Delta Air Lines Inc.: Delta
DAL,
+0.69%

reports first-quarter results on Thursday, amid bigger questions about when, if ever, higher prices — including for airfares — might turn off travelers. The carrier last month stuck with its outlook for big first-quarter sales gains when compared with prepandemic levels. “If anyone’s looking for weakness, don’t look at Delta”, Chief Executive Ed Bastian said at a conference last month.

But rival United Airlines Holdings Inc.
UAL,
+1.50%

has told investors to prepare for a surprise loss, even though it also reported a 15% jump in international bookings in March. And after Southwest Airlines Co.’s
LUV,
+0.03%

flight-cancellation mayhem last year brought more attention to technology issues and airline understaffing, concerns have grown over whether the industry has enough air-traffic controllers, prompting a reduction in some flights.

For more: Air-traffic controller shortages could result in fewer flights this summer

But limitations within those airlines’ flight networks to handle consumer demand can push fares higher. And Morgan Stanley said that strong balance sheets, passengers’ willingness to still pay up — albeit in a concentrated industry with a handful of options — and “muscle memory” from being gutted by the pandemic, could make airlines “defensive safe-havens,” to some degree, for investors.

“It is hard to argue against the airlines soaring above the macro storm underneath them (at least in the short term),” the analysts wrote in a research note last week.

The numbers to watch

Grocery-store margins: Albertsons Cos.
ACI,
+0.53%
.
— the grocery chain whose merger deal with Kroger Inc.
KR,
+0.96%

has raised concerns about food prices and accessibility — reports results on Tuesday. Higher food prices have helped fatten grocery stores’ profits, even as consumers struggle to keep up. But Costco Wholesale Corp.
COST,
-2.24%
,
in reporting March same-store sales results, noted that “year-over-year inflation for food and sundries and fresh foods were both down from February.” The results from Albertsons could offer clues on whether shoppers might be getting a break from steep price increases.

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