Investors who are uncomfortable with managing risk in wild market oscillations should consider the potential of exchange traded funds designed to remain invested in the markets while having a buffer against downside risk.
In the recent webcast, Volatility is Upending Traditional Portfolios: What’s Your Strategy?, Charlie Ripley, VP of portfolio management, Allianz Investment Management U.S. LLC, argued that the market narrative was already challenged going into 2022, and the Russia-Ukraine conflict has only amplified the uncertainty around the market outlook. Disregarding the geopolitical risks and fallout from the war, investors are still facing strong economic headwinds, persisting inflation, a tightening Federal Reserve monetary policy, and ongoing uncertainty that weighs on risk assets.
Looking ahead, Ripley outlined Allianz Investment Management’s capital market outlook. Growth is expect to slow as cost pressures pick up and corporate earnings are challenged. The Fed will conduct a series of rate hikes in 2022 as inflation pressures continue to mount. Inflation pressures are already broad-based and higher commodity prices only add fuel to the fire. The combination of shifting policy, elevated inflation, and slowing growth will keep modest upward pressure on rates. Valuations are challenged with higher rate regimes and continued uncertainty.
“Conviction in the outlook is lower than normal, leading to more market risk and higher volatility,” Ripley said.
Brendan Cavanaugh, ETF product specialist, Allianz Investment Management LLC, also highlighted market participants’ heightened concerns over uncertainty. According to the Allianz Q4 2021 Quarterly Market Perceptions Study, 79% of Americans expect inflation to get worse over the next year, 67% are worried that the increase in COVID infections will cause another recession, 50% worry that another big market crash is on the horizon, and $27.5 trillion in cash is currently on the sidelines with little to no growth opportunity.
“Allianz research indicates a heightened sensitivity to loss in the current environment. As a result, many investors may be underinvested in the market, and overallocated to cash with little to no growth opportunity,” Cavanaugh said.
Increased equity and market risk has led to increased complexity and risk to get what many would consider a reasonable return, according to Cavanaugh. He explained that 30 years ago, in 1992, a 7% return could have been expected for a portfolio with all the assets in cash equivalents and fixed income and a standard deviation of only 3.2%. In 2007, only 48% of assets would be in fixed income with the remaining 52% in riskier assets, resulting in a standard deviation of 9.4%. In 2022, a portfolio projecting a 7% return almost eliminates fixed income assets at only 4% with the rest in riskier assets and shows a standard deviation of 16.8%.
As an alternative way to maintain market exposure and better manage downside risks, Cavanaugh highlighted Allianz’s suite of buffered outcome ETF strategies, including:
- AllianzIM U.S. Large Cap Buffer10 Jan ETF (AZAJ)
- AllianzIM U.S. Large Cap Buffer20 Jan ETF (AZBJ)
- AllianzIM U.S. Large Cap Buffer10 Apr ETF (AZAA)
- AllianzIM U.S. Large Cap Buffer20 Apr ETF (AZBA)
- AllianzIM U.S. Large Cap Buffer10 Jul ETF (AZAL)
- AllianzIM U.S. Large Cap Buffer20 Jul ETF (AZBL)
- AllianzIM U.S. Large Cap Buffer10 Oct ETF (AZAO)
- AllianzIM U.S. Large Cap Buffer20 Oct ETF (AZBO)
AllianzIM’s buffered outcome ETFs are a series of active ETFs that participate in the growth potential of an equity index to a cap and provide a level of risk mitigation with a downside buffer. They are “designed to bring the in-house hedging capabilities and track record of Allianz Investment Management LLC to the retail investor,” Cavanaugh said.
The buffered ETFs provide index exposure to match the S&P 500 Index returns for a certain range of returns through a synthetic 1:1 exposure to the S&P 500 Index. The ETFs also create a buffer by buying options through a put spread that provides buffers of 10% or 20%. Lastly, the strategies establish or create a cap by selling options or an in-the-money call option to finance the downside buffer.
Allianz also recently came out with the AllianzIM U.S. Large Cap 6 Month Buffer10 Apr/Oct ETF (SIXO) and the AllianzIM U.S. Large Cap 6 Month Buffer10 Jan/Jul ETF (SIXJ), which follow a six-month outcome period. The ETFs seek to match the returns of the S&P 500 Price Return Index up to a stated cap while providing downside risk mitigation through a buffer against the first 10% of the S&P 500 Price Return Index’s losses over a six-month outcome period for new adopters or short-term money, tactical advisors.
Financial advisors who are interested in learning more about Allianz’s buffered outcome strategies can watch the webcast here on demand.