2 Ways ‘Boomer Candy’ Funds Can Boost Your Retirement Savings

“Boomer candy” funds have been all the rage lately on the ETF ( exchange-traded fund ) scene. The term, coined by Eric Balchunas, senior ETF analyst at Bloomberg Intelligence , describes these funds that address a common boomer problem as trying to be safe while not getting out of the market entirely.

Balchunas told GOBankingRates in a phone interview that he calls these “candy funds,” as they are “somewhat irresistible.”

“It’s almost like these were made from an ETF laboratory,” he said. “It’s the latest science.”

Find Out: 4 Things Boomers Should Never Sell in Retirement

For You: The Surprising Way You Can Get Guaranteed Retirement Income for Life

Boomers — who reportedly have about two-thirds of the stock market money — love investing, Yet, while they want to be in the stock market, they are afraid of losing their money.

“They have a problem — these ETFs solve that problem — which is psychological,” said Balchunas. “They hit all the receptors in the boomers’ brain. You can invest with no or little downside. This protection saves the day, and boomers go gaga for that concept.”

These funds came on the scene just a few years ago at an opportune time, when boomers — many of whom use the 60/40 investing strategy — got hit on both ends.

“In 2022 the stock market was down, so it was the first time in their memory that bonds did nothing to protect them and it scared them — which opened the door for candy funds,” said Balchunas.

Michael Collins, CFA at WinCap Financial , also noted that these funds provide a steady stream of income, which is especially appealing to boomers who are nearing retirement or are already retired. And while generating income and diversification are important for them, preserving capital is equally essential to ensure their retirement savings last throughout their lifetime.

“These funds often offer downside protection strategies or capital preservation techniques, making them an attractive option for boomers looking to safeguard their savings,” added Collins.

Sponsored: Protect Your Wealth With A Gold IRA. Take advantage of the timeless appeal of gold in a Gold IRA recommended by Sean Hannity.

Two Strategies

There are two main strategies for these ETFs and they are offered by many companies. As Bloomberg reported , the latest on the scene is BlackRock’s iShares Large Cap Max Buffer Jun ETF, which began trading this week.

“Using options, it will provide investors with upside exposure to the S&P 500 to a cap of around 10.6% and hedge all of the downside over a 12-month period,” Bloomberg reported.

The first strategy, according to the Wall Street Journal , is the equity premium income, or “covered call.” WSJ reports that this method “invests in a portfolio of large-cap stocks while also selling options contracts on those shares.” The funds “generate higher dividend income than is typical in a stock fund — sometimes 8% to 10% — but they also cap investor gains and carry chunky fees.”

Chao Zheng, CFA, CFP, director of investment research and wealth advisor at Bordeaux Wealth Advisors , explained that depending on the specific strategy used, covered call and equity premium funds may generate a high level of income, sometimes higher than what many traditional fixed income investments provide, while still offering some equity-like upside to investors.

Read Next: I’m an Economist: Here’s My Prediction for Social Security If Biden Wins the 2024 Election

The other strategy involves so-called “buffer funds,” which use derivatives. These provide downside protection to investors, said Zheng.

Nicholas Codola, senior portfolio manager at Brinker Capital Investments and head of the ETF model division, echoed the views of Balchunas, saying that these funds really are trying to solve for the dismal showing that bonds have had in the last decade, and more acutely over the last five or so years.

“All investors have been spoon-fed on the 60/40 as a great and expedient way of getting a balanced portfolio, and since the early ’80s that has been 100% true,” said Codola. However, he explained that the low interest rate environment of the last decade coupled with the rapid rate hikes the Fed has instituted since 2022 have created a perfect storm to wreck the beloved 60/40 principle.

According to Codola, the “boomer candy” provides an alternative to bonds that have lost some of their luster and help transform equities — which have strong returns but also a lot of volatility and risk — into something more palatable for the retiree or soon-to-be retired.

“As Mary Poppins said, ‘A spoonful of sugar helps the medicine go down,'” added Codola.

What Are the Risks?

According to Codola, while these products transform and transfer a portion of equity market risk, all of these strategies will respond to what happens to equity markets. “A buffered strategy that protects the first 15% of a decline will still be down 15% if the equity market is down 30%,” he said.

Meanwhile, a covered call strategy will lose 30% if the equity market is down 30%, but the income from the options will help mitigate some of that drawdown. For example, if the strategy is yielding 8% then it would only be down 22%. “Just like eating a bunch of candies might diversify the flavor, the underlying risks are still the same — cavities,” he added.

Other experts noted that the strategies used by these funds, such as covered calls, often cap the upside potential. “In strong bull markets, investors might miss out on significant gains,” said Justin Haywood, president and co-founder of Haywood Wealth Management .

He also noted that they are complex and can come with higher fees compared to traditional index funds. “The higher costs can eat into the returns over time,” he explained.

Some go even further, saying that these don’t offer good investment deals at all, and boomers would be better off using other strategies.

“In the investment world, risk and return go hand-in-hand — the more return you want, the more risk you have to take,” said Aaron D. Sherman, CFP at Odyssey Group Wealth Advisors . “These funds make it seem like investors can have it both ways, marketing the returns without the risk, but that’s just not the case.”

Sherman argued that by capping the gains that an investor receives, these funds jeopardize the long-term returns that most investors count on. “Even at age 70, you need to be investing for the long-term, planning for your assets to grow and last another 20-30 years. If you miss out on the best of the market’s upside, your financial security could be at risk.”

According to Sherman, the shiny packaging of “boomer candy” is “an empty wrapper without much real substance,” and there is no good substitute for a low-cost portfolio allocated to reflect an investor’s time horizon and risk appetite.

A Growing Industry

Asked about the arguments against these funds, Balchunas said that he too didn’t think they would succeed — at least at first — because they are often complex, and advisors were also skeptical.

“But clients want it — it’s a grassroots psychological appeal,” he said.

He also stated that one of the main arguments against them are their fees, which are higher compared to, say, money market funds. But again, boomers don’t want to be out of the game.

“They think they’ll get FOMO,” Balchunas said, adding that boomers “will pay up for peace of mind.”

He believes the trend will continue for another reason, too: The appeal makes it a win-win for companies who offer them, as they are able to “fish in a bigger pond and charge larger fees.”

“You have capitalism in action — and that’s not a bad thing,” he concluded.

The numbers speak for themselves. Just in the past year and a half, the number of companies offering buffer ETFs has reportedly tripled. So prepare for more candy for boomers.

This article originally appeared on GOBankingRates.com : 2 Ways ‘Boomer Candy’ Funds Can Boost Your Retirement Savings