Essential6 Portfolios with Downside Protection
Our portfolios combine ultra-high quality bonds with instruments designed to track global stock index prices. These instruments alone provide downside protection against losses on the first 9% or 15% drop in indexes. Another option protects 30% AFTER the first 5% drop in indexes. In exchange for downside protection there are generous caps on gains.
e6 Portfolios with Downside Protection is conceptually similar to popular equity indexed annuities, but without the credit risk, commissions, paltry caps, and years-long surrender schedules. And all of this with more transparency and low costs.
We add another process that changes everything people understand about downside protection and caps: Due to the liquid nature of the instruments we use, our dynamic step-up strategy allows us to lock in gains and reset the downside protection multiple times throughout the year.
expand the upside cap
obtain a fresh downside buffer
eliminate downside before buffer risk
The chart below illustrates the starting buffer and cap levels of various instruments. In rising markets, “stepping up” into a newer instruments may be a beneficial approach to locking in gains, expanding upside potential, and resetting the buffer level at the same time. This allows an investor to hedge against the next 9, 15, or 30% of losses.
The chart above highlights how an investor could achieve an approximate +10% return, then roll into a new instrument. Doing so would expand the cap (7% from the original cap) as well as reset the Downside protection at a new, higher level. Moving from the April to the August instruments expands the cap by 0.1%, but since the April series has appreciated approximately +5%, this sets the new buffer at a 5% higher level. We believe this type of rotation allows an investor to expand upside caps while resetting downside protection at higher levels.
This instruments will typically lag its benchmark returns in the interim period. Selling in a upmarket will not produce a 1:1 return with the S&P 500 Index.
Conversely, we may identify step-up opportunities after the market has declined, while these instruments are in the “buffer zone.” For example, if the S&P 500 has retreated, this provides an opportunity to an investor to take on greater equity exposure, by stepping up into a newer Defined Outcome with a lower buffer level. This move would reset an investor’s buffer level, providing an additional 9% of downside risk mitigation, while increasing upside exposure should the market begin to rise.
These portfolios are not tax efficient and are most valuable when used inside of an IRA. They may generate tax implications such as short-term capital gains and should be considered in your investment decision making process.