Effective 1 March 2023, this ETF  is now the Satrix Multi Asset Passive Portfolios Solutions Protect ETF (JSE code: STXMAP)

How effective is diversification at smoothing out investment performance during a crash? The NewFunds MAPPS Protect ETF was designed to withstand a volatile equity environment by splitting investments between SWIX 40 equity and government bonds. One of the very few perks of living through a pandemic-induced market crash is the opportunity to test our theories in real time.

Pandemic markets

On 19 March 2020, the Top 40 index reached its lowest point since 2013. Those who thought themselves regionally diversified soon realised how very correlated markets around the world truly are. The S&P500 reached its lowest point on 23 March. But for currency diversification, even a regionally diversified ETF portfolio would have lost around 20% of its value in a calendar month.

Since regional diversification can only do so much during a global crisis, it falls to asset class diversification to smooth out the investment ride. The listed property sector has been such a disaster since before the crash, it’s not even worth barking up that tree. That leaves bonds and cash. The NewFunds GOVI ETF reached its low on 24 March, right in step with the S&P500 and only a few days after the Top 40 index.

MAPPS Protect in crisis mode

If a pandemic hits and markets crash on the day you were planning to sell your shares, you would either have to sell your share at a low price or wait for the price to go up before selling. You can only get around this by making sure you hold assets that won’t see-saw as you get closer to living off your investments, or so the theory goes.

The MAPPS Protect ETF (MAPPSP) tries to solve this problem on your behalf. It’s specifically designed for investors with a shorter time horizon and those who struggle to maintain their mental balance during turbulent times. It comes pre-diversified, with an eye on stability. 10% of the ETF is pure cash. A 50% allocation to a mixture of inflation-linked and nominal government bonds is supposed to ensure stability in trying times. The remaining 40% of your investment goes to local shares. Since more than half the ETF is diversified away from equities, at least half of your investment is supposed to hold its value in the short term.

While short-term, local volatility is certainly smoothed out by this allocation, the theory doesn’t hold water during a crash like the one we just faced. When there’s panic in the markets, investors sell what they have. That includes bonds. While we weather the storm, cash is the only asset not making us seasick.

Could the recovery hold the key?

For a long-term investor, a crash is only part of the story. If you had no intention of selling your investment in the short-term, how long it takes for your investment to return to pre-crash levels is also significant. The sooner you can get back to where you were, the sooner you can start making money again. As you can see from the chart above, this ETF has not yet returned to its pre-crash levels, but neither has the Top 40. Will a diversified portfolio recover sooner? Time will tell.