Inflation and market volatility have served as a stark reminder of the value of financial advice, new research shows. And sales data suggest that advisors are trying to allay client fears by putting them in ETFs that aim to provide steady income streams while mitigating downside risk.
Among roughly 120 adults with at least $250,000 in investable assets and who work with an advisor surveyed by State Street Global Advisors this summer, about three-quarters reported discussing inflation with their advisor.
Investors are also growing more concerned about market volatility, with only 31% of the 242 investors (advised or do-it-yourself) participating in the survey saying they are comfortable with the highs and lows of the market. That’s down from 51% of respondents to the same question a year ago.
All of this is helping advised investors see the importance of advice, with roughly 90% saying they value their advisor’s guidance even more during market uncertainty. Eighty-six percent say their advisor helps them stay confident amid rising inflation, State Street’s survey found.
Advisors looking to help clients better stomach the volatility or to find income streams that keep up with inflation have turned to ETFs. But it’s not necessarily the old standbys used in past cycles to fight rising prices.
Treasury inflation-protected securities, or TIPS, are among the more straightforward inflation-fighting tools, since their rates rise with inflation. But TIPS ETFs have been in outflows this year, to the tune of $1.6 billion year-to-date through August.
Gold, another tried-and-true antidote, started off the year strong, but has seen investors flee the past two months: the SPDR Gold Shares has shed $3.8 billion since June 30, and the iShares Gold Trust is down $763 million.
Instead, it money appears to be going into products that focus on alternatives to fixed income, like dividends and options writing strategies, or to products that aim to offer some protection from downside risk and volatility.
So-called derivative income strategies, including buy-write or covered-call strategies, seek to generate income on top whatever returns of an underlying index might offer. The product aim to do so by selling or buying options on the underlying securities to generate income from the premiums and putting down price floors for trades to mitigate risk of losses.
These products have amassed $14 billion in the first eight months of the year, making it a top-10 best-selling Morningstar category, according to the Chicago-based fund tracker. Assets in these strategies has grown from $10 billion as of August 2021 to $26 billion one year later.
Options-trading strategies, including defined-outcome or managed-volatility ETFs, likewise have seen strong sales as investors use options to place guardrails on the amount of risk they are willing to take with a particular index. By sacrificing some upside potential, investors can buffer against portfolio losses. Such products have taken in $6.8 billion year-to-date through August, according to Morningstar Direct.
These complex trading strategies have attracted significant buzz – and plenty of new product launches. Still, little compares with the moves advisors and investors are taking to protect against inflation and navigate the Federal Reserve’s sharply higher interest rates.
Ultrashort bond funds, which invest in fixed-income securities that fall just outside of what a money market fund might invest in, have amassed $31.1 billion. That haul makes such strategies part of the best-selling fixed income category this year, according to Morningstar Direct data. Ultra-safe government bonds also have gotten love: $27.3 billion has flowed into long government bond ETFs, $18.3 billion into intermediate government ETFs and $7.9 billion into short government strategies.