Two ETFs that Generate Income in an Innovative Way

Plus, the importance of maintaining cash reserves

Ric Edelman: It's Thursday, November 14th. I got a question from William. He's in Connecticut. Here's his question.

William: “With all the talk lately about interest rates coming down, there's a question about where to store your short-term money. Personally, I don't see the need to differentiate between short-term money and long-term money. Let's say I invest all my money in long-term investments like stocks, bonds, and ETFs.

And let's say I need some cash real quick to handle some expense that has come up. All I need to do is to sell some of my investments, so why do I need to have any short-term money in money market funds?”

Ric Edelman: Yeah, William, your question is really timely because we just did a webinar yesterday on this topic on how to manage your money and generate income while interest rates are coming down. So, you're asking a really relevant question.

I get your point, but here's what you're not thinking of: if at the moment you did need some cash real quick. What if the stock market were down? What if your investments had fallen in value? Do you really want to have to sell while the price is low merely because you've got some short-term financial need? That's the purpose of cash reserves. In fact, let me even give you a worst-case scenario that we have experienced in this country.

We've experienced it several times. We experienced it in 1987. We experienced it, in the dot-com bubble crisis. We experienced it after 9/11, we experienced it in the pandemic. The stock market was closed. The federal government shut down the financial markets out of a fear of panic that would cause people to have a so-called run on the banks, like they did in the crash of ‘29. And if you needed money, something urgently, and the stock market literally wasn't open for business, how would you access your money?

This is why you need cash reserves. This is why you need money in your local bank. And you could even argue, but what if the banks are closed? A so-called bank holiday that the government might impose as it did after 9/11. Well, similarly, this is why you have money in a fireproof safe in your home. Not a lot of money, just enough to get you through a few days or, you know, a week or so, so that you can put gas in the car or buy bread.

This is why you do this. So that you don't have to sell in a down market, even assuming the markets are open for you to sell. It's really that simple. This is why you have short-term money in money market funds. It's why you have short-term money in bank savings and checking accounts. It's why you have short-term cash needs literally buried under your mattress. Although I would recommend you choose something safer than a mattress.

So that's why you do it. William, I hope that's persuasive. The bigger issue is how do you manage your money so that you aren't going to experience losses in the account in the short term? Well, that's the focus of the webinar that we just did yesterday. If you haven't watched that, the link to it is in your show notes. That leads to today's topic.

You know, with interest rates dropping and then rising and now they're dropping again, you might not really be sure how to generate the investment income you need. I mean, it seems that it might not be something that you're really prepared for. This is the focus of what we talked about yesterday for a full hour. Let me summarize for you, a little bit of it here.

In the webinar yesterday, I had two of the senior executives from Invesco, Renee Reyna and John Borrello, and we talked about, among other things, the Invesco QQQ Income Advantage ETF, the ticker symbol is QQA and it gives you the exposure to the NASDAQ 100 index and it also adds an active option income overlay that generates income for you. We talked about it in a lot more detail on the webinar. So, I encourage you to check that out.

And at the same time, it gives you downside protection against market losses, but exposure to the market so that you can participate in the upside. This fund has names you quickly recognize because it's based on the NASDAQ 100. So, it's got Nvidia, Apple, Microsoft, Amazon, Broadcom, Meta, Tesla, Alphabet, and Costco. The annual expense ratio is just 0.29%, very low.

And then there's also the Invesco S&P 500 Equal Weight Income Advantage ETF. That ticker symbol is RSPA. This one invests equally in all 500 stocks in the S&P 500. And like the QQA, it adds an active option, income overlay for income generation, downside protection, and upside participation.  With again, a fee of just 0.29%.

But what's interesting here about RSPA is that it's an equal-weighted S&P 500 fund. This solves one of the biggest criticisms I've always had about the S&P 500 stock index. That is a cap-weighted index.

When Standard and Poor's invented the S and P 500, they weren't really trying to create an investment opportunity. They were trying to create a proxy for the U. S. economy. Everybody always wants to know, how's the economy doing? And one great way you can get a gauge on that is by looking at the performance of the stock market. If stocks are doing well, that's an indication the economy is doing well.

So, what they did was that they created an index of the 500 biggest companies in America. But the committee at Standard Poor's made an intelligent observation. They said, look, although we're picking the 500 biggest companies in America, because the biggest companies have the biggest impact on the economy, the biggest reflection of the economy. Let's be honest. They said the biggest company in America has a much bigger impact on the economy than the smallest company in America. So, let's create this index of 500 stocks, but let's sort them. Let's rank them. Let's filter them based on their size.

So, let's put the biggest company at the top, #1, and let's put the smallest company at the bottom, #500. And let's allocate to these 500 stocks based on how big they are. So, this creates a cap-weighting, a market capitalization weighting. The biggest stocks at the top get most of the allocation of the S&P 500. The smallest at the bottom get the least allocation. This makes perfect sense if you're going to use the S&P 500 stock index to serve as a gauge, a window, into what's going on in the U. S. economy.

But they never really intended for this to be an investment strategy. If you think about it, it's a dumb one for the simple reason that the top 25 stocks of the S&P 500 are so big that they have more money in them than the other 475 combined. In other words, why bother investing in the other 475, if the amount you're investing in them is so tiny that it really doesn't have any impact on the investment results?

In other words, if you were to invest $1,000 in the S&P 500 stock index, you would have more than $50 in the top 25. The stocks down around number #400, #450 and so on would have mere pennies. Out of a $1,000 investment. What's the point? This is why I've often been critical of the S&P 500 as an investment strategy because the market cap-weighting distorts the allocation. It's just silly.

The Invesco S&P 500 Equal Weight Income Advantage ETF solves this problem.  It takes all 500 stocks and allocates equally to all 500 of them. This way, all of the stocks have an equal impact on the investment results. This makes much more sense from a diversification perspective. It makes much more sense from an asset allocation perspective. And that's a big reason why I like this fund's construct more so than the ordinary typical S& P 500 construct.

So, I invite you to do two things. I invite you to go watch the webinar that we just did yesterday with Invesco about these couple of ETFs and a whole lot more. We spent a whole hour in that webinar, not just the few minutes here with you here today. So go click on the link. It's in your show notes. That'll take you to a replay of the webinar that we just did yesterday. It's free. And also go to Invesco.com and check out what they have to share with you at their website. It's Invesco.com. The link to that is in the show notes for you as well.

If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube, and remember leave a review on Apple podcasts. I read them all. Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app.  

I'll see you tomorrow.

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Links from today’s show:  

Invesco QQQ Income Advantage ETF (QQA): https://www.invesco.com/us/financial-products/etfs/product-detail?productId=ETF-QQA

Invesco S&P 500 Equal Weight Income Advantage ETF (RSPA): https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Investor&productId=ETF-RSPA

Invesco Website: https://www.invesco.com/corporate/en/home.html

11/13 Webinar Replay - An Innovative Way to Generate Income in a World of Declining Rates: https://www.thetayf.com/pages/november-13-2024-an-innovative-way-to-generate-income

10/9 Webinar Replay- Crypto for RIAs: Yield, Staking, Lending and Custody. What’s beyond the ETFs? https://dacfp.com/events/crypto-for-rias-yield-staking-lending-and-custody-whats-beyond-the-etfs/

Certified in Blockchain and Digital Assets including Crypto Taxation Course/Webinar: https://dacfp.com/certification/

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Brought to you by:  

Invesco QQQ: https://www.invesco.com/qqq-etf/en/home.html

State Street Global Advisors: https://www.ssga.com/us/en/intermediary/etfs/capabilities/spdr-core-equity-etfs/spy-sp-500/cornerstones

Schwab: https://www.schwab.com/

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