The Wall Street Journal recently reported that Baby boomers have flocked to a hot new class of Exchange Traded Funds (ETFs) that aim to ease the pain of investing in the stock market. The article referred to these funds as “Boomer Candy” because they allow retirees to invest in stocks while protecting against a potential market slide. These funds didn’t exist before 2020, but they’ve brought in almost $120 billion since then1. In the last year alone, they’ve attracted over $31 billion.
The sweetest Boomer Candies are “equity premium income” funds that invest in large-cap stocks and stock options to generate higher income than a typical stock fund. Some offer up to 8-10% annualized income by capping investor gains.
Buffer ETFs are another popular investment option that protects against downside losses at a predefined level. Some even provide 100% downside protection, but the upside is also capped and must be held for the duration of the fund's life (typically one to two years) for the buffer to work.
Boomer Candy has an obvious appeal, especially after a year like 2022. Retirees can’t take the same risk as someone half their age, but sitting in cash isn’t always the best approach either (back out taxes and inflation, and not much is left). It’s also hard to sit on the sidelines when the stock market is rallying on exciting trends like artificial intelligence and the prospects of lower interest rates (rocket fuel for stock prices).
What I found to be surprising about this article was who is not investing in Boomer Candy. There was no mention of a large endowment, pension fund, or any other form of professional investor buying these funds. You’d think that if some innovation was setting the investment world on fire, the deepest pockets would lead the charge, but that doesn’t seem to be the case.
If I had to guess, I’d say these are Boomer Candy and not “Endowment Candy” because institutions would rarely consider using funds like these. It’s not because the strategies and/or goals are flawed. It’s hard to imagine any investor wouldn’t want to protect against loss while still participating in up markets.
Instead, the aversion to Boomer Candy is likely due to the vehicle itself. ETFs have revolutionized investing, but they aren’t the optimal way to implement every investment strategy. In this case, these funds tend to have higher fees and stripped-down features compared to institutional solutions.
For example, one of the funds highlighted in the article tracks the Nasdaq-100 and protects against the first 10% loss in the index over one year. So, if the index is down 15%, the fund would be down 5%. Gains are capped at 20%, which has hurt investors over the last year since the index is up close to 40%. It also costs 0.85% each year.
Despite the capped return, many investors see a lot of value in a fund like this. The Nasdaq is a volatile index that lost over 70% of its value during the dot-com bubble. Paying for some protection makes sense to someone who got burned back then.
The bottom line
Rewind the clock back half a century, and almost no individuals owned stocks because it was too hard to access them. Mutual funds and regulation changed all that, and by doing so, created a tremendous wealth effect for our country.
Boomer Candy is another step in the right direction for investors looking for solutions like these. Sure, these ETFs may not be exactly what institutions are using. Still, for many investors, they’re better than other options that predate them. I’d wager that we will only see even sweeter Boomer Candy over the coming years.
The bottom line is that Boomer Candy is one of the rare financial innovations that should be applauded because the more this industry democratizes access for individual investors, the better. Providers like First Trust and other ETF innovators who formulated Boomer Candy should be encouraged to do more.
Sources
1 https://www.wsj.com/finance/investing/retirees-boomer-candy-investing-fund-62454210
Disclosures
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.