How advisors can get 'insurance for their equity portfolios'

Wealth preservation is crucial in these uncertain times and buffer strategy offers a contractual outcome

How advisors can get 'insurance for their equity portfolios'

Advisors can reinforce their portfolios with an “insurance for their equity portfolios” that’s vital to wealth preservation.

The First Trust Cboe Vest U.S. Equity Buffer ETFs offer exposure to the S&P 500 that features downside protection of 10% to help investors preserve their hard-earned investment capital while still participating with the upside of the market.

Learn more about this strategy during a free Wealth Professional webinar on Wednesday, December 2 at 2pm. For more details and to register, click here.

Karl Cheong, Head of Distribution for First Trust Portfolios Canada, said typical habits of insurance include for your life, car and house, despite the probability of using that insurance less than 1% on a yearly basis. However, with the market down once every five years, that’s a 20% of a decline every year.

He explained: “When you're down with the S&P 500, whether you're an active manager, or you're a passive investor, you’re going to be down to basically the full amount. In this case, this is the only product in the open-ended forum – ETF or mutual fund – that going forward is a contractual outcome that is not up for chance.

“There is no reliance on historical numbers or correlations that determine your outcome. The only consideration is what the S&P 500 will do in the year going forward. This is one of the best financial planning tools because this can help the advisor forecast with certainty what their outcome might be in the marketplace.”

With the first ETF launched in August 2019, First Trust has seen close to $3 billion raised. It’s one of the fastest-growing categories at the company and in the industry as a whole.

These products gain traction in times of volatility – which shows no sign of easing amid a global pandemic – and Cheong said these products reduce volatility by 20-30%. He said they are ideal for wealth preservation for clients with $250,000 and above, and that this is not a Robinhood-style Tesla home run attempt.

“With these clients, their number one concern going forward is wealth preservation," he said. "They’ve already made their wealth via their business dealings or entrepreneurial dealings, and they don't want to make it twice.

“They want consistent returns in order to preserve their portfolio, rule number one like Buffett says, and then grow it if the market allows them to do so. We think because fixed income rates are so low, and you can’t produce anything on that side, that makes it even more challenging. You have a market that's at all time highs, and you have fixed income that’s not giving you anything. The reality is, where do you get certainty in an uncertain world?”

The webinar will get into the nuts and bolts of the strategy and how it’s offering the transparency that Cheong believes is not out there with other structured products.

He said: “They tend to be opaque and lack transparency, so we’ll provide details on how this product works and how the most successful and elite financial advisors use this product within their investment portfolios in a meaningful way in order to reduce volatility and increase returns.

“We’ll also discuss how to effectively trade these instruments in the marketplace, as we often get question about liquidity, through detailed analysis of the underlying holdings.”

For more details and to register, click here.