A strategy to counter investor behaviour and volatility

ETF can help shape the modern portfolio given low interest rates, says company president

A strategy to counter investor behaviour and volatility

Buffer ETFs may not have the breaking news appeal of an Apple or Tesla stock but one asset manager believes they are the perfect antidote to investor behaviour during volatile times.

Steve Neamtz is president of Cboe Vest, the creator of target outcome investing strategies, a growing tool designed to give investors a more defined outcome. Its First Trust Cboe Vest U.S. Equity Buffer ETF is directed to Canadian investors – it trades on the TSX – and offers exposure to the S&P 500. It has a framed outcome that is set at the beginning and is delivered over a one-year period.

He said: “The bottom line is that this investment has a layer of protection, which is protecting from that first day from the zero line, where you start, down 10% on the S&P 500 point to point for a one-year period of time, while simultaneously providing investors upside opportunity to a capped level.

“These upsides, in the context of historical market returns are pretty darn attractive. When you look at 50-year mean returns of the S&P 500 you're talking high single digits towards 10% range. The caps that we are attaining, based on the market conditions today, put those opportunities above that level.”

Neamtz said many clients do not do well when suffering losses, which test their patience and often lead to them getting out of the market at the most inopportune time.

He added: “These instruments give the investor both protection, if needed, to the tune of 10%. Just a correction in a bull market cycle could easily be 10% and investors don't do well with that as a group.

“Investors tend to not come close to the performance of the instruments they attempt to invest in because they're in and they're out and they get the timing wrong because no one can time it right. This eliminates a lot of those issues and brings them a level of confidence to feel more comfortable about being there.”

Neamtz also believes buffer ETFs will continue to grow as the classical 60-40 fades to be replaced by more effective counterbalances to the equity market. He told WP the industry is at a crossroads and that we are very near the end of a secular interest-rate cycle – not the 8-10-year cycle but the 80-100 year cycle.

“These come to fruition, like one did back in the late 1920 and early 1930s, where markets on the bond market side got to a zero bound. And you know what, we're there again, and that's when the 40% side doesn't serve you.

“When you look at the attribution of how these buffered ETFs behave, they become a prime candidate to replace what's probably not going to work as well as it has historically - some of that bond portion of the portfolio. And that's where advisors are getting busy with these buffered ETFs.”