[The following "ETF Issuer Perspective" is sponsored by Invesco PowerShares]
Retirement simply used to mean the end of work. Today it takes on an entirely new definition. Many preretirees view their oncoming retirement as an opportunity to explore new options and a chance to enjoy a second act. Furthermore, as life expectancy continues to increase, people are spending more time in retirement than they may have originally planned. While increased longevity is generally viewed positively, preretirees are increasingly worried about preparing properly to live longer and fuller lives.
Increased life expectancy brings greater uncertainty on the best way to save for retirement. Alongside today’s complex and ever-changing retirement landscape are concerns about retirees outliving their money. Therefore, preretirees need a plan of action that puts their investment portfolio to work in order to live quality and fulfilling lives in retirement. By searching for ways to responsibly enhance income in a portfolio strategy, preretirees can look forward to peace of mind once they reach their retirement.
So how can they do that? Smart beta.
At times coined “alternative beta,” “strategic beta” or “intelligent beta,” the investment approach is still a relatively new phenomenon. In simple terms, smart beta represents an alternative to traditional indexes that may outperform a benchmark, mitigate risk or both in active or passive vehicles. While smart-beta indexes are still transparent and rules-based, they offer investors exposure to alternative sources of return, and help reduce risk in portfolios by increasing diversification. For those who have a shorter investment time horizon, smart beta has the potential to offer a level of capital appreciation and growth, particularly in a low-interest-rate environment.
Those currently approaching retirement are in a stage where they need equity exposure yet are wary of the volatility of an S&P 500 Index or comparable index. As the Federal Reserve weighs a potential rate hike and many anticipate a broad market correction, given the potential for increased market volatility, now is the time for preretirees to identify strategic investment vehicles, which can help them best achieve their investment objectives. Therefore, a low-volatility smart-beta strategy may help provide a higher likelihood of achieving their retirement goals efficiently.
Low-volatility exchange-traded funds make it possible to remain invested in equities—thus participating in a potential market upside and protecting long-term purchasing power—while minimizing retirees’ market exposure, thereby protecting their portfolio from a major decline. These ETFs invest in stocks, but emphasize those that exhibit the least irregularity, while still making it possible to generate positive returns.
While volatility is merely one factor addressed through the adoption of smart-beta ETFs, it is an essential component of retirees’ investment decision-making, particularly those who suffered through volatile market conditions and a resulting recession in the not-too-distant past, exposing the risks of aggressive investment strategies.
For those looking to retire in the coming years, many are apprehensive regarding their long-term financial security, considering today’s newfound longevity. It is important to keep in mind that while the retirement landscape has changed, so too has the investment landscape—with more opportunities and challenges surfacing in both. Therefore, in an effort to ease preretirees’ concerns and help them accumulate as much wealth as possible to last their lifetime, it is important for investors to get smart on smart beta.
Dan Draper is the head of Invesco PowerShares and managing director of Global ETFs.