Tim Urbanowicz, Innovator ETFs’ chief investment strategist, recently appeared on CNBC’s ‘Squawk on the Street’ to discuss his investment strategy for 2025, following a historic year for ETFs with $1.1 trillion in inflows in 2024. Urbanowicz outlined a year where maintaining momentum (“keeping your foot down on the gas pedal”) while managing risks (“hedging our tail”) would be key.
He predicted the S&P 500 could reach around 6,700, representing a 13% increase from current levels, driven by strong consumer balance sheets and a pro-growth administration that could facilitate over 10% earnings growth. However, he cautioned that this optimism is underpinned by fragile valuations, which have surged 20% to 30% over the past couple of years, placing the market in the 93rd percentile relative to historical valuations. This high starting point means that any adverse developments could lead to significant drawdowns.
Addressing why investors should hedge despite potential market gains, Urbanowicz emphasized the role of sentiment and momentum in current market dynamics, highlighting the substantial downside risks due to these elevated valuations. He recommended focusing on options-based ETFs, specifically mentioning Innovator’s QFLR, which offers exposure to the Nasdaq 100 with a 10% floor against losses. This strategy provides investors with 70% to 80% of the upside if tech stocks continue to perform well, while offering significant downside protection.
When discussing the cost of such embedded options or hedges, Urbanowicz explained that in the case of QFLR, the protection is funded by selling short-dated out-of-the-money call options. This method offsets the cost of buying the protective puts, creating a balanced approach to risk management. He argued that given the current economic and market conditions, where good news on fiscal and monetary policies is expected but not guaranteed, the cost of such protection is justified.
Urbanowicz’s insights suggest a cautious yet opportunistic approach to investing in 2025, where investors should look to capitalize on continued growth while being prepared for potential volatility due to high valuations and market sentiment.
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