ETFs That Diversify S&P 500 Risk

August 22, 2019

Innovator S&P 500 Buffer ETF – July (BJUL)

BJUL, with $68 million in assets, is one of a long—and growing—lineup of Buffer ETFs Innovator has been bringing to market in the past year. These strategies essentially offer a preset range of performance that captures much of the market’s upside and limits downside losses. As our fund report describes it, BJUL is “effectively an options spread play on the price version of the S&P 500.” Similar to UTRN, the fund carries a 0.79% expense ratio.

Specifically, in the case of BJUL, investors get about 14% of upside participation, but more importantly, they get 9% of downside protection—meaning, they don’t start losing money until the S&P 500 drops more than 9%, at which point BJUL begins participating in the downside. That range of participation is reset every year in July.

The first of its kind, which launched a year ago in July, BJUL is now one of 18 Innovator Buffer ETFs focused on the S&P 500 delivering a defined ride to investors. And in this lineup, Innovator also offers deeper levels of downside protection in the form of Power Buffer and Ultra Buffer ETFs, delivering 15% and 30% downside cushion on any S&P 500 downside move, respectively.

Year to date, BJUL has lagged SPY—as expected—and the path of returns seen in the chart below show the more rangebound performance this type of strategy delivers:

 

 

Invesco S&P 500 Downside Hedged Portfolio (PHDG)

PHDG is an ETF that mixes exposure to S&P 500 stocks to VIX Index futures in an effort to manage downside risk. As our fund report for PHDG says, “The fund aims to stave off the impact of huge market downturns by a holding a security that often spikes up when the S&P plummets: VIX futures.”

The actively managed ETF should, by design, outperform the stock market when it crashes, but it should also underperform when things are going well for stocks. A look at year-to-date performance relative to SPY shows just that—downside protection has meant giving up much of the upside in the S&P 500 this year:

 

Charts courtesy of StockCharts.com

 

PHDG has beta of about 0.5, meaning the portfolio is only half as volatile as the broader market, according to our data.

This ETF has struggled to find a following. It has amassed only $23 million in assets gathered in almost seven years since inception. It costs 0.39% in expense ratio—not an outrageous price tag for an actively managed ETF that maintains a costly exposure to VIX futures. PHDG isn’t the only exchange-traded product to dip into the S&P 500 and VIX waters for an equity portfolio that offers some downside protection.

The Barclays ETN+ S&P VEQTOR ETN (VQT), for example, is a very similar strategy that hedges exposure to equities with VIX futures. It is even smaller, with $14 million in assets gathered in nine years. And it costs 0.95% in expense ratio, or $95 per $10,000 invested.

Plenty More To Choose From

These ETFs are a sampling of what tools are available to you today if managing downside risk in your U.S. large cap sleeve is your goal. With more than 1,000 smart beta ETFs slicing and dicing markets today, you can imagine these three funds highlighted here are hardly your only choices.

But they illustrate that innovation in ETFs is alive and well. These funds—particularly UTRN and BJUL, which are only about a year-old—are unique takes on a problem everyone faces: minimizing losses in downward-moving markets.

ETF issuers continue to break new ground on finding solutions to common investor problems by broadening access and sharpening tools at everyone’s disposal with the click of a single ticker.

Contact Cinthia Murphy at [email protected]

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