What to Be Asking as FANG ETF Returns Match Bonds’

In the two and a half years before the start of August, the SPDR 1-3 Month T-bill ETF (BIL) produced a total return of about 4%. 

Now, if you asked 100 investors what the return was over that time for the Microsectors FANG+ ETN (FNGS), loaded up with the 10 most iconic contemporary “super stocks,” what might they assume? 100%? 75%? “Only” 60%?  

The answer is 5%. Not annualized, total. That’s right, since early 2021, FNGS has beaten T-bills by a total of 1%. And that includes a period in which T-bill rates were essentially at zero.   

How can this be? And more importantly, how can savvy financial advisors and investors take advantage of what are likely to be emotional misperceptions, the type that seem to occur in every stock market cycle? 

During a year such as the current one in which the Nasdaq-100, FNGS, etc. post eye-popping returns, advisors’ clients can get caught up in the “now” and lose sight of what happened to set up the current market trend. For instance, the Invesco QQQ Trust (QQQ) lost about one-third of its value last year, meaning a 50% rally would get it to break even.  

With QQQ up 40% year to date as of last Aug. 4, one could say it’s still working on getting even for 2022.  

Stock vs. Bond ETF Perception Issues 

This presents a perception issue that advisors need to overcome. They may try to deliver this perspective, but risk that message being drowned out by the daily headlines about strong returns, a possible Fed pause, a so-called economic soft landing and a reversal in inflation.  

In addition, with 4% yields or higher now available across the entire U.S. Treasury yield curve, from one-month bills to 30-year bonds, and with the three-year U.S. Treasury note approaching 4.5%, locking in low volatility returns is getting easier.  

So, while FNGS could fly higher, the risk would appear to be much greater than it was at the start of this year. This was captured fairly neatly in a recent tweet by investment strategist Michael Kantrowitz, who pointed out that many of the most damaging stock bear markets were proceeded by a strong public perception that a bad recession would somehow be averted. So, here we are again.  

For advisors and investors looking to capitalize on a potential scenario in which the safest ETFs compete well with or exceed the multiyear returns of the types of investments many currently consider to be “magnificent,” here are a few places to do some homework.  

SHY, PSQ: T-Bill and Stock ETFs to Check Out 

The iShares 1-3 Year Treasury Bond ETF (SHY) allows investors to creep along the yield curve, past T-bills (which go out only to one year maturity) and to the start of the T-note curve. SHY represents a part of the yield curve that allows investors to enjoy those attractive rates for significantly more time than BIL investors can count on. The ETF has been around since 2002, and has amassed just over $25 billion in assets. SHY yields 4.99%. 

And for those who want to try to profit from a return-to-earth scenario in FNGS stock valuations and prices, the ProShares Short QQQ (PSQ) takes QQQ and essentially aims to perform in the opposite direction.  

To be clear, this is not intended to be a long-term investment, given the mathematics involved in “single-inverse ETFs” like PSQ. That explains why in a year like 2022, PSQ saw its assets balloon from about $500 million to $2 billion. And, when QQQ’s bounce-back occurred this year, PSQ’s assets fell more than 50% from that peak.   

Financial Advisor’s Role 

A financial advisor’s overarching role in the investment part of their practice is seeking to balance reward potential with risk taken, at the individual client level. If there was ever a time when convincing investors that they should have perspective that dates to before the start of this strange stock market year, it is now. 

That the total returns of BIL and FNGS are about even with each other over the past 30 months reminds us that everything has risk. And psychologically, we tend to forget about the losses when "the big comeback" happens.