Best ETFs For Downside Protection

February 12, 2016

Michael McClary, Chief Investment Officer, Akron, Ohio-based ValMark Advisers

Volatile markets can often lead investors to make decisions more quickly than they normally would. Before making any major investment decision, we recommend going through the proper research process and making decisions through the lens of a disciplined investment philosophy.

Too often we see investors making investment decisions "running from" one investment and "running to" another. It is hard to make quality decisions with that mindset.

We have four sound paths that investors might consider in this market.

First, stay diversified. Long-term strategic diversification is a sound disciplined investment strategy over time. There is a reason soldiers and rescue workers go through so much training: They are supposed to rely on training to make decisions in chaotic situations. We would encourage investors not to abandon their training.

Second, we believe in and manage portfolios with a proven institutional-quality volatility management overlay. These portfolios are designed to reduce exposure to equities in periods of high volatility. Our TOPS Managed Risk ETF Portfolios have significantly outperformed the market in this year's pullback.

However, we recommend investors choose and stick with this type of strategy over time. We would caution investors from trying to time their way in and out of these strategies, which can defeat the purpose of the overlay and leave investors disappointed. Quality strategies will deliver over time, but only cash investments are designed to deliver every day. Don't confuse investments with the U.S. Postal Service.

Third, given the wild short-term swings we have seen in the interest rate market, investors might consider the PIMCO Enhanced Short Maturity Strategy (MINT | B) or the Guggenheim Enhanced Short Duration Bond (GSY | B). For investors who want short-term capital protection, these ultra-short strategies might provide more stable results than even IEI. With interest rates falling so much this year, many ETFs that target the short to intermediate end of the curve risk a surprise snapback in rates.

Lastly, clients may want to consider short- to intermediate-term laddered municipal bonds. In this area, we favor using individual issues or the target maturity municipal series offered by iShares.

Clayton Fresk, Portfolio Manager, Watkinsville, Georgia-based Stadion Money Management

Being a tactical manger with a defensive bias, we place enormous importance on downside protection. This protection comes in various degrees.

For our more tactical mandates, we can move completely out of equity ETFs and into cash or short-duration fixed-income ETFs. For other strategies, we may rotate into lower-beta offerings or into noncorrelated holdings.

Despite what form it comes in, we believe protecting against losing any previously captured gains is of utmost importance when measuring performance over full market cycles.


Contact Cinthia Murphy at [email protected].

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