Accessing downside protection with ETFs

‘Risk control is an inescapable feature of today’s financial market landscape’

Edoardo Mezza

The debate about active versus passive investing is becoming increasingly outdated. ETFs are still referred to as passive vehicles only out of habit or laziness. Sophisticated and active strategies are on board today’s ETFs.

Think about the risk control strategies. During the period from 31 December 2019 to 15 September 2023, markets endured at least three negative events of exceptional magnitude – without mentioning specific episodes involving individual companies like Credit Suisse or Evergrande. However, the VIX has mainly moved sideways. It was almost as if the markets had been in a period of calm and growth. Obviously, nothing could be further from the truth.

Admittedly, performance to date has been positive in many cases but only for those who decided to hold out rather than exit. We do not yet have any idea if we are on the way to a new phase of normality. This is why many investors are asking themselves how they can stay invested and minimise the impact of the sudden and dramatic collapses that are always lurking around the corner. To answer this question, you do not need to be a weathercaster. Nor do you need to rely on an active manager. The answer just comes convincingly from some long-established risk-reducing strategies offered by the ETF industry...

Edoardo Mezza is a director and Filippo Arena is a private banker at Banca Patrimoni Sella

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full article, click here.

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