Avoiding the Lure of Mediocrity
Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson
The market has been on something of a roller coaster ride over the few weeks since our last Insights publication. Tariffs (is anyone sick of that word yet?) continue to dominate headlines. The initial investor shock of the magnitude of the tariffs has been replaced by the day-to-day sentiment swings on news of concessions and escalations. As sentiment sours and fears mount, we’ve seen a resurgence of shiny objects for investors to contend with – but not the usual cast of characters.
The Shiny Objects of Yesteryears
In the past we’ve warned about the lure of, so-called, shiny objects. These were generally bull market temptations like MEME stocks, SPACs, cryptocurrencies, and NFT art. They fed on investor emotions and fear of missing out. For example, a US News & World Report article from April 23rd 2021 called SPACs “all the rage” and go on to say, “SPACs offer an opportunity for average investors to invest in pre-IPO companies.” Sounds great! Sign me up. The article ends highlighting three SPAC ETFs to consider. How did those SPACs do?
- Defiance Next Gen SPAC Derived ETF (SPAK) – Closed in August 2022, down over 40% from the date of the article (the S&P 500 was up about 3%).
- Morgan Creek Exos SPAC Originated ETF (SPXZ) – Closed in August 2022, down over 40% from the date of the article (the S&P 500 was up about 3%).
- SPAC and New Issue ETF (SPCX) – Still open, but down about 13% since the date of the article, compared to the S&P 500 up 36%.
A Changing Landscape
The environment now is different. The stock market is weak, investor concerns are elevated, and the shiny objects being pushed reflect that shift. Gone are the promises of high excess returns. Now my inbox is filled with promises of low volatility and limited downside. Buyer beware.
Many of the solicitations I receive are for private investments, touting their low volatility. But this is usually a false narrative. Just because you don’t measure the value of something often does not make its value stable. These investments are often highly levered, and their value is just as susceptible to the current tariff challenges as similar public companies.
Guaranteed Mediocrity
The other product we see pushed more fall into the category of buffered ETFs. These securities give you exposure to an index like the S&P 500, but they cap the downside. Of course, there are costs – they cap the upside returns and typically come with high internal fees. If history is a guide, stocks will go up more than they will go down, so you are likely to significantly underperform the market with these products. As my colleague Max says, these funds guarantee mediocrity. If you want to reduce portfolio risk, there are better ways.
Whether markets are rising or falling, there will always be shiny objects preying on emotion to lure investors into something that may not be in their best interest. We are always here as your advocate and to help you navigate around potential portfolio pitfalls.
Headline of the Week
Another Fed Conundrum
While tariff status continues to dominate headlines, various Federal Reserve officials have been on the lecture circuit, and they are beginning to wade into this fraught topic. The uncertainty puts the Fed between a rock and a hard place. The size, extent and duration of any tariffs have the potential to impact both Fed mandates with inflation and unemployment moving higher. Any interest rate moves in such a scenario need to be calibrated carefully. Raise rates to fight inflation and there are risks for higher unemployment. Conversely, lower rates to fight unemployment and there are risks for higher inflation.
Fed officials seem locked into their long-standing “wait and see, data dependent” mode. With market volatility spiking, calls are growing for pre-emptive rate cuts to get ahead of any economic hiccups. While Fed-speak this past week addressed various scenarios that could tilt their thinking, those scenarios remain hypothetical, and the Fed remains (like us) evidence-based.
The Week Ahead
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