Zero Risk Stocks: Do They Exist?

Introduction

• Zero Risk Stocks: Stocks that promise no losses when the market goes down, but gains when it goes up.
• Discussion on whether they truly exist and their practicality.
• Video aims to explain who might benefit from these investments and who might not.

Definition and Types

• Zero Risk Stock:
  • Also known as Buffer ETFs or Defined Outcome ETFs.
• ETFs (Exchange Traded Funds):
  • Basket of stocks, offering diversified investments.
  • These specific ETFs track the S&P 500.
• Goal: Provide downside protection and allow participation in market upsides.

How They Work

• Mechanism:
  • Use option contracts to limit downside risk and allow upside potential.
  • Investors don't lose money during market downturns but have limited gains during market upsides.

Key Concepts

• Protection:
  • The amount of market downturn these instruments protect against.
• Cap Level:
  • The upper limit of gains one can achieve in a given year.

Examples and Comparisons

• Buffer Protection Examples:
  • 100% protection: No losses, only manage expense ratio.
  • 15% protection: Market drop of 20% results in only 5% loss for the investor.
• Cap Examples:
  • An 8% cap means maximum 8% gains even if the market rises by 25%.

Historical Performance

• Past 10 Years (2013-2023):
  • Consideration of various market events, including COVID downturn.
• Comparing ETFs:
  • Colos S&P 500 Structure Alt Protection ETF
  • Black Rock iShares Large Cap Max Buffer ETF
  • FJW (Third ETF example)
• Performance:
  • The third ETF, despite lower downside protection, yielded better results due to higher cap.
  • When compared to SPY (S&P 500), these ETFs underperformed significantly.

Historical Data and Long-term Performance

• Data from 1926 Onward:
  • Analysis using same protection and cap rules.
  • SPY dramatically outperformed buffer ETFs over nearly 100 years.

Suitability and Strategy

• Not Suitable For:
  • Young investors, aggressive growth seekers with long time horizons.
• Ideal For:
  • Bond replacement strategy.
  • Risk-averse investors.
  • Individuals close to or in retirement.

Conclusion and Considerations

• Risk Perception:
  • Evaluate risk tolerance and investment goals.
  • Weigh the $100,000 potential gain from SPY against perceived safety of buffer ETFs.
• Investment Access:
  • ETFs can be purchased via brokerage platforms.
• Call to Action:
  • Evaluate personal suitability for buffer ETFs.
  • Engage with content for more insights on investment strategies.

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By understanding the function and implications of zero risk stocks, investors can make informed decisions on whether these products align with their financial goals and risk tolerance.