In today’s volatile market, some investors may seek strategies to protect their capital while offering potential gains. Although such strategies might sound too good to be true, they exist.
Syfe’s Downside Protected Portfolio is an innovative approach based on the widely followed S&P 500 index. For those unfamiliar, the Standard and Poor’s 500, or simply the S&P 500, is a stock market index that tracks the performance of the largest 500 publicly listed companies in the U.S.
In this article, we will explain how Syfe’s Downside Protected Portfolio works and who it is suitable for.
What Is The Syfe Downside Protected Portfolio?
The Syfe Downside Protected Portfolio is an investment portfolio designed by Syfe to offer investors the opportunity for investment growth while limiting their downside risk.
The portfolio is constructed using a combination of exchange-traded funds (ETFs) and option strategies, which provide a balanced approach. This structure allows investors to participate in the potential upside of the S&P 500 index but with reduced exposure to market volatility and losses.
This portfolio’s key advantage lies in its ability to minimise risk without sacrificing potential gains, making it an attractive option for those seeking higher returns in uncertain markets.
This Syfe portfolio has two main features:
Downside Protection: This is achieved through the use of option strategies, which serve to cap potential losses during market downturns. Essentially, this protection allows investors to shield their capital from significant market declines while remaining invested.
Upside Participation: While protection is in place to limit losses, the portfolio also retains the ability to capture gains when the S&P 500 performs well. This ensures that investors can still benefit from positive market movements, albeit in a more controlled and less volatile manner.
Even if the market takes a big dive, your losses will be capped at a specific amount (which is the estimated max loss level)
To keep the cost of this downside protection low, there’s a limit on how much you can make when the S&P 500 rises (the current upside cap). So, while you’ll still see profits, it won’t be as much compared to buying a plain-vanilla S&P 500 ETF outright.
As of 10 September 2024, the estimated max loss stood at 3.4%, and the current upside cap was 12.3%.
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At this point, you are probably wondering how the Syfe Downside Protected Portfolio works and why the maximum loss is only an estimate while the upside cap is explained as current upside cap.
To understand this, we must look at how Syfe creates the portfolio.
How Syfe Downside Protected Portfolio Is Constructed
Syfe Downside Protected Portfolio uses a combination of call and put options to replicate the S&P 500 returns, provide downside protection, and finance the protection. There are three layers to this:
#1 The first layer replicates the S&P 500’s returns. This is done using an ETF that buys a deep-in-the-money call option on the S&P 500, allowing it to mirror the index’s returns.
#2 The second layer provides downside protection. The ETF buys a put option, aiming for a predetermined maximum loss corresponding to the estimated maximum loss level in the portfolio.
#3 The third layer is to pay for the protection by selling a call option through the ETF. This caps the upside level, corresponding to the current upside cap in the portfolio.
Here’s how the portfolio construction looks like diagrammatically:
Syfe’s investment team periodically re-optimises the portfolio to ensure it remains aligned with current market conditions. This involves replacing existing ETFs with new ETFs to allow investors to capture higher upside beyond the initial current upside cap while at the same time locking in the portfolio gains.
The estimated max loss and current upside cap will be revised either when Syfe initiates a re-optimisation, or when the underlying options in the ETF expire and are rolled over to new options.
Who Is The Syfe Downside Protected Portfolio Suitable For?
Syfe Downside Protected Portfolio is suitable for risk-adverse investors who prefer to minimise potential losses while still being able to capture upside potential.
One way to think about the portfolio is that it has significantly lower volatility than a regular equity portfolio.
For example, as Syfe explains, consider March 2020, when the COVID-19 pandemic triggered widespread panic selling. The S&P 500 experienced a dramatic 33.9% decline, and global bonds dropped by 25.7%. In contrast, Syfe’s Protected Portfolio would have weathered the turmoil with only a modest loss of 3.8%.
This stability trend continued in 2022 when the Federal Reserve launched its most aggressive rate-hiking cycle. While the S&P 500 plunged by 25.4% and global bonds fell by 24.3%, the Protected Portfolio would have limited its losses to just 2.7%.
This portfolio is particularly suited for lump-sum investors who prefer to invest all their funds at once but are hesitant to enter the stock market due to uncertainty about its direction. It allows these investors to stay engaged in the market while waiting for better opportunities, offering them peace of mind during volatile times.
Syfe also highlights that the Protected Portfolio’s unique combination of downside protection and moderate upside potential makes it a valuable addition to an investment portfolio. By mitigating losses during market downturns, as demonstrated in 2020 and 2022, it enhances a portfolio’s overall resilience.
Additionally, the Protected Portfolio has a low correlation with traditional asset classes such as bonds and equities. By incorporating it into an existing investment strategy, investors can effectively reduce overall downside risk and volatility, resulting in a more balanced and stable portfolio over the long term.
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What Are The Risks Involved?
The Protected Portfolio is a complex product with several risks investors should know.
One of the primary risks is that while the downside is limited, the portfolio’s value can still decline if the S&P 500 index falls, much like any other stock market investment. Although the portfolio is designed to protect against severe losses, it cannot eliminate the risk of losing value in a market downturn.
Another key risk is related to currency fluctuations. Since the Protected Portfolio is denominated in US dollars, changes in exchange rates can impact your investment returns, particularly for non-US-based investors. If your local currency strengthens against the US dollar, your returns may be lower when converted back.
Finally, the Protected Portfolio has an upside return cap. This means that if the portfolio’s value increases beyond the predetermined cap, investors cannot benefit from any further gains, limiting the potential for high returns in solid market conditions.
Should You Invest In The Syfe Downside Protected Portfolio?
Ultimately, deciding whether to buy the Syfe Downside Protected Portfolio depends on your investment goals and risk tolerance.
If you are a risk-averse investor looking for a way to invest in the S&P 500 with downside protection, then the protected portfolio is something you can consider.
On the other hand, if you are a long-term investor who can afford to take on market volatility since your financial goals are decades away, then you may be better off buying the S&P 500 ETF outright through other portfolios Syfe offers.
Read Also: Syfe Core and Syfe Equity100: What Are the Differences Between These Two Robo-Advisory Portfolios?
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