Chasing a horse that's already left the barn is one of the oldest mistakes in the investing playbook -- ask anyone who bought tech stocks in early 2000 or energy stocks in the spring of 2008. Just as those investors fell victim to the lure of quick profits, many today are paralyzed with fear. And now the new S&P 500 Capital Appreciation (symbol SSPAX), a so-called principal-protected fund, is here to trip them up.
At first glance, the fund sounds like a sure thing. It vows to return at least 150% of your principal in ten years, less fees and expenses, provided you invested at or below the fund's net asset value per share at inception ($10). At the same time, the fund lets you tap the potentially boundless gains of Standard & Poor's 500-stock index.
But then there's the fine print. Those fees and expenses knock your 150% minimum return down to about 119% -- meaning a minimum NAV of $11.94 in ten years. That's an annualized gain of just 1.7%. What's more, you're promised that return only if you hold on until the fund's "special redemption" date, December 1, 2018 (after that, the fund turns into an ordinary S&P 500 index fund). And those boundless gains of the S&P 500? That refers only to the value of the index; you can kiss dividends goodbye.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The fund's managers buy options on the S&P 500 to ensure the fund keeps its principal-protection promise. But it's expensive protection -- the cost of those options accounts for most of the "fees and expenses" eating your returns.
If the S&P 500 appreciates over the next ten years, you'll reap some, but not all, of its price gains because of fund expenses and the fluctuating value of those options. On average, your gains will lag those of the index by 1.6 percentage points per year, says Ramesh Menon, founder of Structured Investment Management (SIM), the New York City firm that runs the fund.
Moreover, the importance of those lost dividends can't be overstated. Over the past ten years through April 9, the S&P 500 declined at an annualized rate of 4.4% when you look at price appreciation alone (or in this case, price depreciation), but it lost only 2.8% annualized when you factor in dividends. The S&P 500 recently yielded 3.4%.
Menon thinks this type of fund could be a serious contender to replace target-date retirement funds. Target-date investors "need to be invested in the stock market because that's where the returns have been historically," says Menon. But because those people know they're going to need a particular amount of money at a particular time, "they can't take any risk with respect to their principal over that time," he says.
Menon is hoping that the fund's accessibility -- you can buy it for a $1,000 minimum initial investment through SIM and for a $2,500 minimum through the Fidelity and Schwab retail fund networks -- will make it a contender for individual investors. (As of April 9, the fund's NAV per share was $9.81; if you bought at that price, you'd still be guaranteed an NAV of $11.94, amounting to a minimum annualized return of 2.1%.)
Better times ahead. That kind of a safety net could have been a boon over the past ten years. But the sheer immensity of the past decade's decline makes it unlikely that the market's performance over the next ten years will be similar. Instead of hunkering down in some contraption that plays on their fears, long-term investors should take advantage of the most favorable buying opportunity in a generation. One way to do that is with a low-cost index fund, such as Vanguard Index 500 (VFINX), or an exchange-traded fund, such as SPDR S&P 500 ETF (SPY).
-
Stocks Chop as the Unemployment Rate Jumps: Stock Market TodayNovember job growth was stronger than expected, but sharp losses in October and a rising unemployment rate are worrying market participants.
-
Should You Renew Your CD?With rate cuts impacting earnings, we examine if now is a wise time to renew CDs.
-
7 Ways to Plan Now to Save on Medicare IRMAA Surcharges LaterUnderstand the critical two-year lookback period and why aggressive planning before you enroll in Medicare is the most effective way to minimize IRMAA.
-
Best Banks for High-Net-Worth Clientswealth management These banks welcome customers who keep high balances in deposit and investment accounts, showering them with fee breaks and access to financial-planning services.
-
Stock Market Holidays in 2025: NYSE, NASDAQ and Wall Street HolidaysMarkets When are the stock market holidays? Here, we look at which days the NYSE, Nasdaq and bond markets are off in 2025.
-
Stock Market Trading Hours: What Time Is the Stock Market Open Today?Markets When does the market open? While the stock market has regular hours, trading doesn't necessarily stop when the major exchanges close.
-
Bogleheads Stay the CourseBears and market volatility don’t scare these die-hard Vanguard investors.
-
The Current I-Bond Rate Is Mildly Attractive. Here's Why.Investing for Income The current I-bond rate is active until April 2026 and presents an attractive value, if not as attractive as in the recent past.
-
What Are I-Bonds? Inflation Made Them Popular. What Now?savings bonds Inflation has made Series I savings bonds, known as I-bonds, enormously popular with risk-averse investors. How do they work?
-
This New Sustainable ETF’s Pitch? Give Back Profits.investing Newday’s ETF partners with UNICEF and other groups.
-
As the Market Falls, New Retirees Need a Planretirement If you’re in the early stages of your retirement, you’re likely in a rough spot watching your portfolio shrink. We have some strategies to make the best of things.
