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May 16, 2020, 8:02 a.m. EDT

These funds were made to protect against market downsides. So how’d they do in the March madness?

The recent market sell-off and turbulence that went along with it was painful, but offers a chance to evaluate certain funds

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By Andrea Riquier


Bloomberg
Markets just got body-checked. How did funds that promised protection handle it?

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 /zigman2/quotes/210599714/realtime SPX -0.56%  , as measured by the SPDR S&P 500 ETF Trust /zigman2/quotes/209901640/composite SPY -0.57%  , 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.

Buffer funds

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 /zigman2/quotes/202938168/composite UAPR -0.12%   among that lineup did worse than the broader market, and returns among the rest /zigman2/quotes/216718022/composite UMAR +0.08%   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.

/zigman2/quotes/210599714/realtime
US : S&P US
3,152.05
-17.89 -0.56%
Volume: 2.60B
July 9, 2020 5:11p
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/zigman2/quotes/209901640/composite
US : U.S.: NYSE Arca
$ 314.38
-1.80 -0.57%
Volume: 83.35M
July 9, 2020 4:00p
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/zigman2/quotes/202938168/composite
US : U.S.: Cboe BZX
$ 24.26
-0.03 -0.12%
Volume: 4,997
July 9, 2020 3:04p
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/zigman2/quotes/216718022/composite
US : U.S.: Cboe BZX
$ 26.66
+0.02 +0.08%
Volume: 896.00
July 9, 2020 2:01p
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