Ask the Fool: Buffer ETFs
Q. What are “buffer” ETFs? — C.D., Brooklyn, New York
A. They’re exchange-traded funds designed to reduce investors’ risk by limiting their losses. That sounds good, but the funds also put a cap on gains. There are now more than 100 buffer ETFs and a few mutual funds of the buffer variety.
It’s worth knowing that buffer funds don’t actually hold individual stocks or bonds — they’re more complex, investing in options. They also may not limit losses as much as you’d want. Per the folks at Morningstar, buffer funds were down more than 12% year to date as of the end of September. Each such fund specifies a buffer percentage, which might be up to 30%, and its investors usually only suffer losses if the underlying index drops below those limits.
Buffer funds can differ widely, so research any you’re considering. Or take an easier road: Invest your long-term dollars mostly or completely in the stock market, understanding that there will be some extremely good and bad years — and that over long periods, the stock market has generally gone up.
Q. What’s a “defensive” stock? — R.P., Kalispell, Montana
A. Defensive stocks belong to companies that aren’t too affected by fluctuating economic conditions. For example, during a recession, many consumers might put off buying big-ticket items like cars or big sofas, and might postpone big vacations. They’re much less likely to stop buying certain other things, though — such as food, gasoline, electricity, soap, diapers, medications and even cigarettes.
You don’t need to avoid cyclical stocks (like automakers, furniture retailers and airlines), but do be careful about when you buy. In the meantime, stocks of companies that consumers depend on can protect you from cyclical swings.
Fool’s School: Money-saving year-end moves
The calendar year is closing soon, and tax season is around the corner. To keep as many of your dollars in your pocket as possible, there are some smart moves you might make before the end of the year. Here are several:
- The Tax Cuts and Jobs Act of 2017 roughly doubled most standard deductions, so it’s harder to have enough deductions to make itemizing worthwhile. But if you may be able to itemize, try generating more deductions before the end of the year. For example, make donations to charity in December rather than January.
- If you’ve sold some stocks and have substantial gains, and there are also some losers sitting in your portfolio, consider selling them before Dec. 31 — because gains can be offset by losses, shrinking your tax bill. (If you plan to buy those shares back, wait at least 31 days, for the loss to count.)
- If you haven’t contributed to tax-advantaged retirement accounts such as IRAs and 401(k)s, do so. The maximum IRA contribution for 2022 is $6,000 (plus $1,000 if you’re 50 or older); the 2022 maximum salary deferral into a 401(k) plan is $20,500 (plus $6,500 for those 50 and older). You have until April 18, 2023 to make IRA contributions for 2022, but the 401(k) deadline is Dec. 31, 2022. Contributions to “traditional” accounts can shrink your tax bill for 2022, while contributions to Roth accounts get a tax break later, upon withdrawal. Learn more about these plans at Fool.com/retirement.
- If you have a workplace-based Flexible Spending Account (FSA) to help you pay for qualifying expenses on a pretax basis, remember that that’s use-it-or-lose-it money. Some employers may give you an extra couple of months to spend it, and some may let you roll over up to $500 to the following year.
- Look into what tax credits and deductions you may qualify for. You can get more information at IRS.gov, USA.gov and Fool.com/the-ascent/taxes.
My Dumbest Investment: The next Amazon
My dumbest investment happened because I thought that Jumia Technologies would be the next Amazon.com. — C.H., online
The Fool responds: Given how successful Amazon has been, and how MercadoLibre has grown in Latin America, many investors have been intrigued by any e-commerce company with the potential to grow briskly, especially if it’s targeting an attractive market. Enter Jumia Technologies, which had many people thinking it would become the Amazon of Africa — a continent with a population now topping 1.4 billion. As more investors became aware of it and piled in, its stock surged; it increased in value by more than 500% in 2020 alone.
At that point, though, great expectations had been priced into the stock — and they weren’t met. Jumia’s revenue has not grown since 2020, and it has lost money in each of the past few years. In 2021, Jumia’s stock fell by about 72%, and as of mid-November, it had fallen more than 60% in 2022.
A few weeks ago, the company announced that its co-CEOs were stepping down, and some investors worry about Amazon entering Africa. The company may still turn itself around and prosper in the future, but those who invested at high prices have been burned. It’s generally safer to stick to companies with proven track records of growth and profitability.
Foolish Trivia: Name that company
I trace my roots back to my 1969 founding as a Silicon Valley startup. I had success in my early years making computer chips. I supplied chips for Intel for a few years in the 1980s, and in 1991, I released microprocessors compatible with Intel’s, which I’d reverse-engineered. Later, I produced chips for Compaq computers and chips that would run the Windows operating system. Today, with a recent market value topping $115 billion, I’m involved in high-performance computing and graphics, and visualization technologies, for (among other things) gaming, immersive platforms and data centers. Who am I?
Last Week’s Trivia answer
I trace my roots back to 2011, when two guys prepared to launch an online jewelry store, only to quickly change direction. I was bought by PetSmart in 2017 for $3.35 billion and spun off as a publicly traded company in 2019. Today, I’m a premier retailer of pet products, offering more than 2,000 brands and more than 100,000 products. I have more than 20 million active customers and rake in more than $9 billion annually. I offer pharmacy services and a wellness and insurance program. More than 1,000 veterinary practices use my software. Who am I? (Answer: Chewy)
The Motley Fool Take: Moving beyond videoconferencing
Zoom Video Communications (Nasdaq: ZM) delivered triple-digit revenue growth (year over year) for several quarters following the onset of the pandemic, but growth decelerated sharply over the past year, and shares were recently down 68% from their 52-week high.
But don’t count out Zoom. It divides its customers into two groups — online customers and enterprise (business) customers. While the number of online customers exploded during the pandemic, they haven’t all stuck around. So Zoom shifted its focus to enterprise customers, a group that’s easier to retain and is more open to upselling. Enterprise customer numbers grew 18% year over year in the second quarter, while revenue from enterprise customers rose 27%.
Zoom’s brand recognition paved the way for a land-and-expand growth strategy that is gaining momentum. Zoom Phone surpassed 4 million seats in August, up 100% over the past year, and two newer products look promising: Zoom Contact Center is an omnichannel customer service solution, and Zoom IQ for Sales is AI-powered software that analyzes conversations in Zoom Meetings to help sales teams work more productively.
Zoom isn’t a buy-it-and-forget-it kind of stock, but it has multiple ways to fuel growth, and long-term investors should take a closer look. (The Motley Fool owns shares of and has recommended Zoom Video Communications.)
— distributed by Andrews McMeel Syndication
