How to Invest in AI While Reducing Risk

Now the AI trade has been behind the markets three straight years of double-digit gains.

We've seen the AI trade hit some volatility recently, and that often weighs on the S&P along with the Nasdaq.

Now while retail investors still look at tech giants, there are some ETF options available for those looking to be defensive while still hedging.

The market now joining me to discuss this is John Borrello, senior portfolio manager for Investco's global strategies team.

John, thank you so much for being here.

Thanks for having me, Johnny.

So John, let's talk about this because AI has been top of mind for a lot of people.

So staying invested in AI while managing risk, what does the company's funds actually explore this and how does it?

Yes, so you hit on the head.

The market can be categorized as uncertain right now.

A lot of people want to have exposure to the NASDAQ 100, to big tech, to the AI theme, but our clients are also asking for ways to manage downside risks.

So they're looking to reduce the volatility associated with having that NASDAQ 100 exposure.

So in your point of view, what are the key product angles for these, these funds that you guys actually work with?

Yes, so we have two ways that are options based to manage risk within the NASDAQ 100 complex.

One of those is QQA, which is our Invesco QQQ Income Advantage ETF that reduces volatility by 20 to 30%, so a smoother ride while adding attractive monthly income so you can collect cash flow while you hold that exposure.

The second one is QQHG, which is Invesco QQQ hedged advantage ETF, and that one reduces risk by more like 40%.

So it's a more defensive way to hold NASDAQ exposure but without the income, so it's kind of a pure hedged equity strategy.

So I want you to take us through the recent market context regarding the volatility and the selloffs that are making investors look to be a little bit more defensive and on hedge.

So you know, the market has been choppy.

There have been some cracks in the armor in terms of having that big tech exposure and the exposure to ag, the hyper scales, etc.

There's some worry about how it's all going to play out.

And also I would mention that the market has never been more concentrated in a single trade than right now.

So for instance, the top 10 names in the S&P 500.

Contribute 63% of the risk of the index.

You're seeing that at the same time that ownership of US equities is at an all-time high.

So you know roughly 45 to 48% of US households own stocks today.

So you have both concentration and a lot of ownership, and this chopiness happening.

People are looking for a way to hold that exposure with less downside risk.

So that's where QQA and QQHG come into play.

So let's talk.

A little bit more about the funds.

So when it comes to the actual funds, what makes them different?

Yes, so QQA is option income oriented where we're using no leverage but selling options to generate yield in a way that is not correlated to interest rates.

So it's an interesting way to diversify your cash flow and your income exposure.

We do this through laddering the options on a daily basis.

These are one month options that are laddered.

That's a differentiator because we smooth path dependency.

QQHG is more of a hedged equity exposure where we're buying put options to really contractually reduce the downside risk associated with the Nasdaq 100.

We also ladder that exposure to keep it, you know, less path dependent.

So let's talk about the broader ETF story unfolding in the markets nowadays.

So what are you seeing play out?

So you're seeing a lot of launches in the ETF space.

It's never been easier to get an ETF to market.

And so we always caution investors and advisors to really look at what's under the hood with with the launches, and you know the pace of new ETF products coming to market has never been faster.

We think that can be both a good thing and something that investors should be cautious about because you know with more choices it becomes more difficult sometimes to know really what's under the hood.

So when we look at this, you know, we think it's really important to have an institutional grade professional team that's managing an active ETF.

Obviously, you know, in Invesco in my team I'm biased.

I think we have that in place, but there are a lot of strategies out there that you know they.

Launch and you don't really know who the people are behind the strategy being managed, so something to look out for.

So really quick last question is in regards to the future in the next 5 to 10 years, how are these funds going to kind of evolve and what are your thoughts on investors looking at eyeing these funds?

Yes.

Well, I, I think you'll continue to see innovation in the ETF space.

You'll continue to see interesting ways to manage risk with options in the ETF wrapper.

I know we're very focused on that with the existing funds that we have, but we're always going to be looking for ways to drive outcomes like less downside risk and added income.

Awesome.

Well John, thank you so much for joining us today.

Pleasure to have you.

Thank you.

Appreciate it.