The idea was simple. There would be three; high growth, moderate and defensive and as volatility increased they’d reduce the equity exposure moving into cash.
This would in theory protect investors from market corrections as they moved into cash.
Each of the three would have different metrics for when and how much cash to hold depending on their risk level.
The pandemic crash of 2020 wasn’t a great test as it was frankly too quick a crash and resulting recovery.
But now we’re in a proper bear market and so I went looking at the performance of the three ETFs against the Top40 from the March highs, and wow. They worked.
Returns 01 March 2022 – 18 October 2022 (excusing dividends)
- Defensive ~ -3.64%
- Moderate ~ -6.24%
- High Growth ~ -9.97%
- Top40 ~ -15.24%
Now sure all are red but way less red that the Top40 and importantly they’re in the right order. Defensive top of the list followed by moderate and high growth.
I have to admit I am impressed. We’ve had a lot of smart ETFs listing and most were frankly just not that smart. Lots of leaker ideas and maths, but very little doing what the sticker says they’ll do.
Zooming out to a three-year chart (below) we see all lagging the Top40, no surprise as the act of offering any downside protection will reduce the upside over time. But look at the defensive ETF. It has really held up well only just behind the Top40.
So what do we tink?
If you want to add some protection to a portfolio they work.
But this is about wanting equity with reduced risk, which will take away profit in the good times.
We also haven’t seen how they’ll do when the Top40 recovers from the sell-off. I’d expect they will underperform. But, this is their point. Protect the downside but at a reduce upside.
Of course, if volatility and bear markets don’t bother you, well then keep on doing what you’re doing.
Full names and JSE codes;
- ABSA NewFunds Volatility Managed High Growth Equity (JSE code: NFEHGE)
- ABSA NewFunds Volatility Managed Moderate Equity (JSE code: NFEMOD)
- ABSA NewFunds Volatility Managed Defensive Equity (JSE code: NFEDEF)
At Just One Lap, we are big fans of passive investment using ETFs. In this weekly blog, we discuss ETFs on the local market and the factors you need to consider when choosing an ETF. If you have wondered how one ETF differs from another, this is where you can find out. We explain which index each ETF tracks, what type of portfolio could benefit from holding each ETF, and how the costs will affect your bottom line.