Protecting Against the Magazine Cover Curse With ETFs

The quirky and reliable indicator has often hinted at coming market surges and declines.

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Reviewed by: Kent Thune
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Edited by: Ron Day

Long time investment advisors are likely familiar with the quirky—and reliable—stock market phenomenon known as the “magazine cover indicator.”

Described by Alpha Cube Investments as a "somewhat irreverent economic indicator," the gauge suggests that "the cover story on the more widely circulated magazines—particularly Time, Businessweek, Forbes, and Fortune in the United States—can be a contrary indicator." Check the above link for a history of market manias, and the magazine covers that marked the point where the rallies were getting quite long in the tooth. 

The most well-known moment in history for this indicator is the 1979 cover of Businessweek which proclaimed, “The Death of Equities,” following a decade of poor stock market returns. Cue the 1980s, and one of best extended rallies the globe has ever seen. That’s the magazine cover indicator at work. 

But it works both ways, historically timing up well with both market surges and declines. In the case of the current stock market, the trend has been persistently up for long enough (excluding one year in 2022 and five weeks in 2020) that if financial advisors are looking for clues, it would be uber-bullish headlines that portend a steep stock market decline. Like the one noted above.

'How High Can Markets Go?' 

But as with anything else in investing or in life, even if one was certain that a magazine picture would eventually be remembered as part of the mania that ultimately resulted in a stock bear market, what really matters is what an advisor can do about it. 

The best advisors prioritize preventing clients from being their own worst enemy when it comes to investing. However, that is easier said than done at a time when cryptocurrency, the Nasdaq, the S&P 500 and sexy single-stock situations dominate their phone alerts.

This is not specific to investing, and it is one reason I flagged this post on X from professional investor Tommy Thornton recently. That recent cover of the Economist magazine simply states, “How High Can Markets Go?” That is likely what all, but the most fervent bulls are losing just a bit of sleep over during 2024.

Blockchain: Potential Uncorrelated Asset? 

What can advisors do, and how can ETFs help? One possibility is to try to identify asset types and market sectors that may not follow the market down. History is filled with examples, but the problem for advisors and their clients is that these are different times. And it is hard to say with confidence that what zigged when the S&P 500 and Nasdaq 100 zagged the last few times will repeat that performance. 

For instance, sectors such as Utilities, Consumer Staples and REITs have mixed track records when it comes to being the ones capable of holding the fort during times when equities attack. So, here are a couple of avenues among many which advisors may research to see if they believe they may offer a way to plug a potential portfolio dam. 

First up is the $160 million Global X Blockchain ETF (BKCH), which debuted in 2021. Its FactSet summary on etf.com, which can be read by following the preceding link, tells the story well, especially the final part:

Holdings are market-cap-weighted, with each pure-play company capped at 12%, and any single pre-revenue and diversified firm capped at 2%. 

That's an indication to me that BKCH might have more to it than its pretty past performance (up 126% the past 12 months). That flexibility to go beyond the “usual suspects” in the blockchain industry, and the potential for blockchain to both benefit from a continued bull market cycle or be considered apart from a decline in the traditional stock market, makes it one to watch.

A Gold ETF With an Income Twist 

The $71 million Credit Suisse X-Links Gold Shares Covered Call ETN (GLDI) has been around since early 2013 but has been cleverly hidden in the ETF landscape. 

Now that covered call-writing ETFs have grown in popularity, advisors can look to using that approach outside of equities. In the case of GLDI, it strikes call options around a core gold position, but those call options are 3% out of the money and freshened up each month. 

That means that GLDI has some upside room while collecting that monthly call income. The fund has delivered an annualized return of 8.3% over the past five years, capturing about 80% of the return of a straight gold ETF like the $58 billion SPDR Gold Trust ETF (GLD). 

The magazine industry has a good track record over a long period of time. However, ETFs have revolutionized the ability of advisors to fight back. After all, blockchain and covered call ETFs were not around decades ago, and investing was not as mainstream as it is now. That would seem to set advisors up to have a chance to win in any scenario. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.