Investments That Offer Protection in a Down Market
Many investors, especially those who are in retirement and pre-retirement, are worried about another market drop. To hedge against another major decline, many investors are now purchasing defined-outcome ETF’s (Exchange Traded Funds). What makes the ETF’s attractive is that for those willing to give up some of the potential upside gains (should the market go up) for downside protection (should the market go down).
Would you be okay with a cap (maximum one-year return) of 12% (market goes up 15%- you would get 12%) knowing that there is 15% downside protection (market goes down 18%- you would be down 3%)? If so, you may want to consider adding some buffered ETF’s to your portfolio.
The funds, also known as buffered ETF’s use options (contracts) to limit losses in exchange for capping (a defined limit) on the gains.
According to a recent Wall Street Journal Article (These Funds Promise Protection in a Down Market. It’s Working, July 29, 2022), the funds totaled close to $13.6 billion and took in $5.4 billion in 2022. These ETF’s (basically, a basket of stocks) protect against a pre-established amount of losses. Most set loss protection of the first 10%, 20%, even 30% of market downside for the one-year obligation.
No ones knows where the stock market will go. It will either go up, be flat, or go down. This strategy takes the guess work out of trying to figure out market gyrations. Think of this strategy as putting guardrails on a portion of your portfolio.
Trading potential higher returns to sleep better at night is the name of the game for buffered ETF’s.
Disclosure: There is no guarantee the funds will achieve their investment objectives. The funds have characteristics unlike other traditional investment product and may not be suitable for all investors. Please see “investor suitability” in the prospectus. Shares purchased after the start of an outcome period may be subject to enhance risks.