Two top rated ETFs that may appeal to retirees
Do these lower volatility and income ETFs meet the definition of ‘Boomer Candy’?
Mentioned: Vanguard Global Minimum Volatility ETF (VMIN), JPMorgan Equity Premium Income ActiveETF (JEPI)
Last week, The Wall Street Journal published a feature entitled “These Hot New Funds Are ‘Boomer Candy’ for Retirees,”
Going with this theme we’ve identified two actively managed ETFs that may appeal to investors that are looking for less volatility and more income in their portfolio while still investing in shares.
The WSJ’s catchy headline plays into the generational stereotype that young people are interested in high-risk investments like crypto and meme stocks while older investors gravitate towards safety.
As much as we try and avoid stereotypes there are reasons that older investors find less volatility appealing. During the transition to retirement volatility – or sequencing risk – can wreak havoc on portfolios and make it more likely a retiree will run out of money. Older investors may also find income more appealing as they start to spend their nest eggs.
JPMorgan Equity Premium Income Active ETF (ASX: JEPI)
J.P. Morgan Equity Premium income takes a nuanced approach to covered calls that delivers high income while reducing downside risk. The ETF earns the highest rating from our analysts with a Gold Medallist Rating.
Read more on covered call strategies.
This ETF’s incremental improvements on a basic covered-call strategy make it a solid option to generate income. It should be noted that income from covered calls generally isn’t tax efficient.
This fund owns a defensive equity portfolio that targets lower volatility exposure to the S&P 500 while systematically selling one-month call options on the index.
The manager trades the options in weekly tranches and targets out-of-the-money calls to capture a modest amount of the index’s upside in addition to collecting the options premium.
In general, covered-call ETFs have not been the best buy-and-hold investments for investors with a longer time horizon. The equity portfolio’s upside is capped, and the downside remains exposed to significant drawdowns, which will likely erode an investor’s long-term total returns.
Even for investors with high-income needs, there may be more-tax-efficient options available. However, covered-call ETFs provide a simpler way to outsource this task and can alleviate problems that come with self-implementation.
This fund’s high payouts and lower-risk equity portfolio work to its advantage compared with rivals. Its underlying index, the S&P 500, is also a reasonable choice for a covered-call strategy. The S&P 500 has enough upside and options liquidity to provide harvestable call premiums, while not being overly volatile like some of the indexes used by category peers.
This strategy uses the equity and options sleeves to reduce losses during index drawdowns. Writing call options in down markets can benefit the fund in two ways.
First, the premium collected can offset losses to an extent, giving the fund an advantage over the index itself. Second, implied volatility increases during sharp drawdowns, which often translates to higher call premiums.
The equity portfolio is also constructed more defensively than the index. It beat the index significantly during the late 2018 selloff and 2022 market meltdown. Shorting call options caps the fund’s upside relative to the S&P 500, but it still kept up with category peers and the category index during recent market rallies. These features contributed to the fund outperforming both the category index and category average since its inception.
This vehicle has been assigned a Morningstar Medalist Rating of Gold as of date May 31, 2024. The trailing 12 month yield was 6.36%.
Vanguard Global Minimum Volatility ETF (ASX: VMIN)
A strong management team and sound investment process underpin Vanguard Global Minimum Volatility ETF's Morningstar Medalist Rating of Silver.
The ETF invests in a diversified portfolio of global shares across small, medium, and large capitalisation, with the aim to reduce volatility and risk.
The ETF is actively managed, with the aim of capturing a large portion of share market performance whilst reducing the magnitude of the sharpest market highs and lows.
The strategy leans toward smaller, deeper value companies than its average global equity peers. The ETF has continually underweighted stocks that have a lower standard deviation of returns compared with Morningstar Category peers over the past few years.
Such holdings can limit a strategy's downside, but cause it to lag in bull markets. The managers have also tended to overweight dividend yield during recent years, shown by the portfolio's high exposure to dividends or buybacks. Higher-yield stocks can provide dependable income, but also have their risks. Dividend payers may cut payouts, for instance, if their earnings fall.
In addition, this strategy has constantly held more illiquid stocks, evidenced by holdings' low trading volume, resulting in higher liquidity risk exposure than peers. Less-liquid stocks might offer strong returns to compensate for their risks, but they can be harder and more expensive to trade in bear markets.
The portfolio is overweight in consumer defensive and industrials relative to global ETFs. It is underweight technology and financial services. The portfolio is composed of 145 holdings and its assets are more dispersed than the typical peer in the category. In the most recent disclosure, 17.4% of the strategy's assets were concentrated in the top 10 fund holdings, compared to the category average's 29.6%.
