The following research was contributed to by Christine Short, VP of Research at Wall Street Horizon.
- Through Q2, there has been a record number of new US ETFs on a rolling four-quarter basis
- Fund issuers have met investors’ demand for high-income equity ETFs, covered-call products, defined-outcome strategies, and single-stock funds
- 2024 has also been the year of crypto ETFs, and funds tracking spot Ether recently began trading
It seems we can always count on Wall Street to come up with ways to scratch all sorts of investors’ itches. That’s seen perhaps most prominently in the ETF space.
Among US ETF providers, the four-quarter rolling total of new-fund issuance has never been higher, according to Wall Street Horizon’s data.
It has been a steady climb over the past four years, with the latest increase being driven by demand for high-income ETFs, covered-call strategies, buffer (or defined-outcome) products, single-stock funds, and the latest round of cryptocurrency plays. Of course, portfolios that track tech and AI remain in vogue. Recent data show that ETFs of the active variety are snatching market share too.
Q2 2024 Marked a Record-High New US ETF Count
A Market Ripe for Fund Growth
Indeed, there are a handful of prolific themes among investors across the risk spectrum. ETF issuers can create funds with relative ease given today’s technology, though it’s not always a lickety-split and inexpensive process. Still, as equity markets have risen since the start of last year and amid a bond market bounce back, there might be more capital available than ever before.
And let’s not forget about more than $6 trillion of cash sitting in money market mutual funds – just as the US Federal Reserve is set to embark on a possible cycle of interest rate cuts.1 In short, it’s arguably never been a better time to be an ETF issuer, evidenced by more major ETF inflows in July. Competition is intense, however, and fees are always in focus among today’s savvy investors.
“Boomer Candy” in the Limelight
And the most seasoned investors are at the center of the latest ETF hot spot – high-income funds. A set of ETFs aiming to produce a high yield with limited risk has taken off. Eric Balchunas dubbed them “boomer candy” products as they are akin to adding a sweet treat to what’s sometimes bland portfolios.
Critics assert that their high fees and complex structures could cause more trouble than they are worth, while proponents assert that the right portfolio is the one an investor can stick to through the good times and bad, even if it comes at a higher price. We’ll leave that up to the ETF pundits, but it’s clear that this new fund type is white-hot. FactSet reports that $31 billion has poured into boomer candy products in the past 12 months as of June, according to The Wall Street Journal.2
The Different Flavors
Experienced investors and portfolio managers can easily wrap their heads around some of the most popular boomer candy ETFs. Equity premium income strategies generally own a basket of liquid large-cap stocks and then sell options on those positions, thus increasing the potential portfolio payout. The drawback is that the upside is often limited to an extent.
Another supposed ETF sweet treat are buffer funds that claim to protect investors against losses, up to a pre-determined percentage on an index, while capping potential gains. Once again, options are harnessed to construct the payoff profile. Data show, however, that the higher the yield, the more likely it is that the ETF may underperform the S&P 500®.3 Of course, each ETF has its own benchmark, so it’s critical that investors perform their due diligence just as they might on an individual stock.
The Popularity of Single-Stock ETFs
It’s not just older investors who are driving high-yield equity ETFs’ popularity surge. It feels like every day there is a new single-stock fund that applies a covered-call strategy for yield enhancement.
Among the latest offerings include the YieldMax Short NVDA Option Income Strategy ETF (DIPS) and the YieldMax ABNB Option Income Strategy ETF (ABNY). From both the short and long sides, these ETFs generally use derivatives to build an allocation that mimics a covered call strategy.
You might come across dividend yields north of 30%, but it’s critical to recognize that such a payout is different from the dividend yield on shares of a blue-chip stock. Rather than a portion of a company’s cash flows being paid to holders, the high stated yield is sourced from option-selling premium.
Crypto’s Coming of Age
ETFs tracking the performance of spot Bitcoin and Ether have also taken the street by storm in 2024. Following the US Security and Exchange Commission’s (SEC) approval of 11 spot Bitcoin ETFs in January, funds following the world’s second-largest digital currency began trading in late July.4 Many issuers already have Ether ETFs trading, including leveraged, short, and futures-based funds. We even see ETFs that will have exposure to both Bitcoin and Ether in the same portfolio for those seeking crypto diversification.
More choices for retail investors could be a good thing – the VettaFi Galaxy Crypto Mining Index, which is designed to track companies that mine or stake cryptocurrency assets and companies that provide hosting services for cryptocurrency mining or staking, proves that owning shares of crypto-mining firms can be stomach-churning. The index has ranged from 342 to above 1000 (total return) in the past year.
The Bottom Line
ETFs are no longer strictly about offering investors access to low-cost and straightforward indexes. New niche strategies have come on strong to meet growing demand among different types of investors. High-yield equity ETFs are having a year, while the list of funds using options on individual stocks grows seemingly by the week. And as the crypto market matures, inexpensive Bitcoin and Ether ETFs make being a cryptocurrency player easier than ever.
Sources:
1 Earnings Release FY24 Q4 – Microsoft Cloud Strength Drives Fourth Quarter Results, July 30, 2024, https://www.microsoft.com
2 Meta Reports Second Quarter 2024 Results, July 31, 2024, https://investor.fb.com
3 Amazon.com Announces Second Quarter Results, August 1, 2024, https://ir.aboutamazon.com
4 Apple reports third quarter results, August 1, 2024, https://www.apple.com
5 FactSet Earnings Insight, FactSet, John Butters, August 2, 2024, https://advantage.factset.com
6 FactSet Earnings Insight, FactSet, John Butters, August 2, 2024, https://advantage.factset.com
7 Fed recap: Chair Powell gives the September rate cut signal traders were hoping for, CNBC, Darla Mercado, July 31, 2024, https://www.cnbc.com
8 FedWatch, CME Group, August 2, 2024, https://www.cmegroup.com
9 Job Openings and Labor Turnover Survey, U.S. Bureau of Labor Statistics, June 30, 2024. https://www.bls.gov/jlt/
10 UNEMPLOYMENT INSURANCE WEEKLY CLAIMS, US Department of Labor, August 1, 2024. https://www.dol.gov/ui/data.pdf
11 July Employment Situation Summary, U.S. Bureau of Labor Statistics, August 2, 2024, https://www.bls.gov
12 Time Will Tell: Information in the Timing of Scheduled Earnings News, Journal of Financial and Quantitative Analysis, Eric C. So, Travis L. Johnson, Dec, 2018, https://papers.ssrn.com
13 CSX CORP. ANNOUNCES FIRST QUARTER 2024 RESULTS, April 17, 2024, https://investors.csx.com
14 Caterpillar Inc. 1Q 2024 Earnings Release, April 25, 2024 https://www.caterpillar.com
15 VF Corporation Appoints Paul Vogel Chief Financial Officer, May 22, 2024, https://www.vfc.com
Wall Street Horizon provides institutional traders and investors with the most accurate and comprehensive forward-looking event data. Covering 9,000 companies worldwide, we offer more than 40 corporate event types via a range of delivery options from machine-readable files to API solutions to streaming feeds. By keeping clients apprised of critical market-moving events and event revisions, our data empowers financial professionals to take advantage of or avoid the ensuing volatility.
Christine Short, VP of Research at Wall Street Horizon, is focused on publishing research on Wall Street Horizon event data covering 9,000 global equities in the marketplace. Over the past 15 years in the financial data industry, her research has been widely featured in financial news outlets including regular appearances on networks such as CNBC and Fox to talk corporate earnings and the economy.
Twitter: @ChristineLShort
The author may hold positions in mentioned securities. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
