Protection in Down Markets, but Growth in Rising Markets?

Famous physicist and mathematician Sir Isaac Newton once said, “What goes up must come down” - or something like that. Officially his proclamation may have been about every action having an opposite and equal reaction. While he was referring primarily to the forces of physics, many people feel the same way about the stock market. The year 2020 has been marked by the COVID-19 virus, civil unrest, and an upcoming election. While none of us know the future, many say that the stock market is bound to repeatedly go up and down.

What if you could get some protection from the down times of the stock market and still profit from the up times? Wouldn’t that be a nice? 

Well, there are investments that have protection as great as 20% while allowing growth of the first 10%. This means that your investment would grow with the market until your investment made a 10% return. If the market continued to grow beyond 10%, you would only receive 10%. However, if the market lost as much as 20%, you would not lose anything.  

Let’s see what would happen if the market rose or fell by the following amounts: 

· Market goes down 15%, this investment loses 0%. You invest $100,000, you lose $0. 

· Market goes down 25%, the investment would lose 5%.  You invest $100,000, you lose $5,000.

· Market goes up 7%, the investment earns the full 7%. You invest $100,000, you earn $7,000.

· Market goes up 13%, the investment earns 10%. You invest $100,000, you earn 10,000.

What kind of investment is it that can provide protection during down times and allow growth during up times? The investment is called a Buffered-ETF (Exchange Traded Fund). 

The benefit of protection comes with the acceptance of limited or reduced participation in potential gains. Bigger buffers against losses correspond with lower limits/participation on gains. The buffer and cap are set on the fund’s release date for a one-year term, known as the outcome period. 

We use a Buffered-ETF rotation strategy allowing us to use multiple Buffered ETFs and extend investment periods indefinitely. For investors wanting to capture gains, but protect themselves against downside risks, Buffered ETFs may be a great fit.