There’s no doubt that with the headwinds facing the economy—from inflation and rising interest rates to volatility in the US banking sector and the possibility of a recession—investors face challenges in knowing the right move for their investments. They might be tempted to react defensively, sheltering assets in low-yield investments until the storm blows over.

But economically challenging times like these are when it’s perhaps most important to remain open to opportunities for growth. Continuing to invest in the stock market remains a viable option, for example, even when faced with such challenges.

With the right strategy, investors can navigate economic uncertainty and achieve their financial goals.

Investing in stocks during challenging times

When faced with economic uncertainty, the key to investing in the stock market is to play the long game. Since the year 1800, stocks have returned an average of 6.5% to 7.0% per year, after inflation.¹

Historically, the S&P 500 has gained in more years than it lost. In fact, the S&P 500 was up 40 of the 50 years between 1972 and 2021, with an average annualized return of 9.4%. In the decade between 2012 and 2021 alone, the average return for the S&P 500 was 14.8% annually.²

While it’s true that the stock market may have its ups and downs, what is equally true is that over the long term and across every market condition—including turbulent economic times—investing in stocks outperforms other classic forms of investment, including 10-year bonds, gold, and real estate.³

Why investing in the S&P 500 still makes sense

The Standard & Poor’s 500 Index (S&P 500), comprising 500 of the biggest publicly traded companies in the United States, not only serves as a measure of the general health of the US economy but also functions as a yardstick for investors to evaluate the performance of their own portfolios. Accounting for approximately 80% of the entire value of the US stock market, the S&P 500 is almost synonymous with the term “stock market.”⁴

To understand the scale of the S&P 500, consider that in 2001, the total market capitalization of the companies comprising the S&P 500 was roughly $10 trillion. By mid-June 2022, that capitalization was approximately $32 trillion.

While there are no “sure things” in investing or in the stock market, it’s worth noting the historical behaviour of the S&P 500. From 1996 to mid-June 2022, the S&P 500 had only five annual declines.⁵ And since 1950, the S&P 500 delivered positive returns 78% of the time.⁶ Considering that time span includes recessions, wars, inflation, and economic crises, the value of investing in stocks over the long-term even in times of economic uncertainty becomes clear.

But beyond a willingness to be in the market for the long haul, are there options for protecting stock holdings from volatility while keeping the option open for potential upside? Yes—by using a covered call strategy for your investments.

Consider a covered call strategy

Covered calls help lower volatility in your investments when the stock market is going sideways. They allow shareholders to generate additional income from existing stock positions while also providing some downside protection.

In a covered call, investors sell options on stock they own for a predetermined price (the “strike price”) by a specific date (the “expiration date”). In exchange for this right, a buyer pays the seller a premium—essentially the price of the option.

If the stock price rises before the expiration date, the buyer can buy the stock at the lower strike price. However, should the stock decline in value below the strike price before the expiration date, the seller keeps the premium paid by the buyer, helping reduce losses.

When the stock stays below the strike price, and the call expires, the investor keeps the buyer premium and can sell another call. Higher levels of volatility in the market generally lead to both higher premiums and higher potential upside for investors.⁷

One study found that between 1986 and 2011, covered calls on the S&P 500 outperformed the S&P 500 overall, with an 830% return on covered calls versus an 807% rise in the S&P 500 during that 25-year span.⁸

Investing in the S&P 500® with ESPX ETF

Looking for an investment solution for these uncertain times? One that will keep you invested in stocks while allowing you to take advantage of market volatility?

The Evolve S&P 500® Enhanced Yield Fund (ESPX ETF) is designed to provide investors with the performance of the S&P 500® Index, with the addition of enhanced yield through active covered call strategies on the underlying securities. This Fund invests primarily in the equity constituents of the S&P 500® Index, while writing covered call options on up to 33% of the portfolio. Covered call options have the potential to provide extra income and help hedge long stock positions.

For more information on ESPX ETF, visit our website at https://evolveetfs.com/espx/ or click here.

For more blogs like this, and for insight on investing and investment products, sign up for our weekly newsletter here.

 

Sources:

¹ Vartika,G., Kohn, D., Koller, T. & Rehm, W., “Markets will be markets: An analysis of long-term returns from the S&P 500,” McKinsey & Co., August 4, 2022; https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/prime-numbers/markets-will-be-markets-an-analysis-of-long-term-returns-from-the-s-and-p-500

² Price, M., “Average Stock Market Return,” The Motley Fool, March 13, 2023; https://www.fool.com/investing/how-to-invest/stocks/average-stock-market-return/

³ De La Cruz, I., “Why You Need to Keep Investing in Stocks Despite the Challenging Outlook,” Investing.com, March 8, 2023; https://ca.investing.com/analysis/why-you-need-to-keep-investing-in-stocks-despite-the-challenging-outlook-200554131

⁴ Price, M., “Average Stock Market Return,” The Motley Fool, March 13, 2023; https://www.fool.com/investing/how-to-invest/stocks/average-stock-market-return/

⁵ Vartika,G., Kohn, D., Koller, T. & Rehm, W., “Markets will be markets: An analysis of long-term returns from the S&P 500,” McKinsey & Co., August 4, 2022; https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/prime-numbers/markets-will-be-markets-an-analysis-of-long-term-returns-from-the-s-and-p-500

⁶ De La Cruz, I., “Why You Need to Keep Investing in Stocks Despite the Challenging Outlook,” Investing.com, March 8, 2023; https://ca.investing.com/analysis/why-you-need-to-keep-investing-in-stocks-despite-the-challenging-outlook-200554131

⁷ Griebenow, N., “How to Position Your Income Portfolio For 2023 with Covered Calls,” Advisor Perspectives, December 13, 2022; https://www.advisorperspectives.com/commentaries/2022/12/13/how-to-position-your-income-portfolio-for-2023-with-covered-calls

⁸ “New Study Compares 25-Year Performance of Options Strategy Benchmarks to Traditional Indexes,” Cboe, February 14, 2012; https://ir.cboe.com/news-and-events/2012/02-14-2012/new-study-compares-25-year-performance-options-strategy-benchmarks-traditional-indexes

 

The contents of this blog are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed. These contents are not an offer or solicitation of an offer or a recommendation to buy or sell any securities or financial instrument, nor shall it be deemed to provide investment, tax or accounting advice. The information contained herein is intended for informational purposes only.

Commissions, management fees and expenses all may be associated with exchange traded funds (ETFs) and mutual funds (funds). Please read the prospectus before investing. ETFs and mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. There are risks involved with investing in ETFs and mutual funds. Please read the prospectus for a complete description of risks relevant to ETFs and mutual funds. Investors may incur customary brokerage commissions in buying or selling ETF and mutual fund units.

Certain statements contained in this blog may constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to a future outlook and anticipated distributions, events or results and may include statements regarding future financial performance. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “anticipate”, “believe”, “intend” or other similar expressions concerning matters that are not historical facts. Actual results may vary from such forward-looking information. Evolve Funds undertakes no obligation to update publicly or otherwise revise any forward-looking statement whether as a result of new information, future events or other such factors which affect this information, except as required by law.