These funds were made to protect against market downsides. So how’d they do in March?
In recent years, investors have flooded into exchange-traded funds offering creative ways to guard against risk. With the market carnage of March and early April hopefully in the rearview mirror, it’s a good time to ask whether those funds lived up to their promise.
To determine that, MarketWatch sourced data from First Bridge Data, a CFRA company and looked at the performance of domestic large-cap ETFs from March 3 through April 17, compared with funds that promised some type of protection against the S&P 500
, as measured by the SPDR S&P 500 ETF Trust
, which fell 6.7% during that time.
The takeaways? There are some clear category winners — the “buffer” products debuted by a company called Innovator — and losers, a pair of “trend-following” funds from Pacer. Within the third category, a broad bucket of funds promising lower volatility than the rest of the market, however, it’s murkier.
“I wish the data did make it obvious that a particular approach worked across all different investment styles,” said Todd Rosenbluth, director of ETF and mutual fund research at CFRA. Still, there are lessons to be learned.
The data reviewed by MarketWatch included 33 of the Innovator buffer funds — 3 for each of 11 months –— and six from a competitor, First Trust. Only one fund
among that lineup did worse than the broader market, and returns among the rest
ranged from -1.6% to -5.3%.
There’s some disagreement among ETF experts about what that means.
“The buffer funds were made for the latest market sell-off,” Rosenbluth said.
In contrast, Ben Johnson, director of ETF research at Morningstar, said, “In my mind investors won’t take much solace in doing less bad.”
The big question now: these funds had an obvious selling point at what was clearly the final innings of a historically long bull market, even if no-one knew coronavirus was about to upend everything. Can they make the same claim now, if markets are near a cyclical bottom and quite likely to start grinding higher?
“If the market rallies further, the caps on the buffer products mean you won’t participate in the upside.” Rosenbluth said.
Johnson also thinks that the buffer products did better than expected in the period before the March shock, “which is counterintuitive,” he said. “Investors had participated more in the upside. That might exacerbate the mismatch in expectations” going forward, he said.
Of course, this strategy may still be appropriate for some people, such as those near retirement, who want to have some exposure to the stock market, while protecting against some risk.
A final consideration about the buffer funds is that they are, in the words of Richard Daskin, who manages portfolios for individuals and households, “legitimate but expensive.”
The management fee is, on average, 80 basis points: enough, for some funds, to tip the balance between outperforming the broad stock market index and underperforming.
‘Low’ and ‘min’ ‘vol’
The First Bridge data also confirm another thesis: a more holistic fund design seems to work better for low-volatility products. That was the argument Daskin offered when MarketWatch profiled two competing such funds over the summer: iShares Edge MSCI Min Vol USA ETF
, and the Invesco S&P 500 Low Volatility ETF
At that time, USMV was edging SPLV because it was tapping a broader index, was exposed to more stocks, and took into account how they worked in combination with others. In contrast, SPLV simply selected lower-volatility stocks. That weighted the fund toward sectors that don’t tend to do well in a rising-interest rate environment, like real estate and utilities.
|Current sector weightings, according to each fund’s web site, in %|
Those conditions held through the March rout. USMV just edged the 6.7% broad market decline with a 6.4% decline, but SPLV lost 9.2%.
USMV offers a “more robust method of putting together a portfolio,” Daskin said in April. The fund’s approach “was borne out, again.”
It’s worth noting, however, that the category winner among these products was the Nationwide Risk-Based U.S. Equity ETF
which lost 5.8% over the period sampled.
Bucking the ‘trend’
If the low- and minimum- volatility products are “like taking an Advil and the buffer products are a little stronger,” Johnson said, “who knows what you’re going to get with the trend following products.”
“Trend following” is a strategy that involves tracking market technical indicators, rather than fundamentals, to dictate when to shift between exposure to a benchmark index and short-term Treasury bills.
Unfortunately, that approach didn’t hold up well in March. Pacer’s two products that fit our report, the Trendpilot 100 ETF
and the Trendpilot US Large Cap
, lost 9.7% and 15.9%, respectively. Trendpilot’s mid cap fund did gain 1.5% during that period, however.
For all the innovation in the world of funds, Daskin is still a fan of an old-fashioned mix of steady exposure to stocks and bonds. Indeed, a portfolio with half its holdings in SPY and half in a Treasury ETF
would have been up 1.25% during the rout, CFRA First Bridge data show.