1 way to ‘bubble-wrap’ your capital & generate income
Risk, volatility and inflation have thrown a spanner in the works for income investors.
Some retail investors are using ETFs to ‘bubble wrap’ their portfolios, according to a recent article published by the AFR and quoting various luminaries from the ETF sector. But does this strategy provide an acceptable level of protection in the year of 2022?
We are big fans of passive index investing using ETFs, and Jake Bogle and Graham Tuckwell are often quoted names in our office. Their low-cost and ability to provide broad based market exposure are highly desirable attributes. However, ETFs are not the ideal structure to achieve every investor objective. An ETF cannot be customised and cannot be agile or responsive, they are vanilla products listed for any investor and serve many good purposes in a portfolio. But they are not ideal for “bubble wrapping” or managing risk within a portfolio. The key message here is that there are alternatives to consider outside of ETFs that can offer a sturdier layer of “bubble wrap” around an investor’s portfolio.
Structured Investments allow investors to “bubble wrap” capital and produce income
If we were to highlight one alternative structure that, in our view, reigns supreme over ETFs in terms of enhancing yield and managing risk it is Structured Investments.
Structured Investments are the vehicle of choice in Europe, Asia and North America for bubble wrapping capital and producing income. They are renowned for providing investors with defined return outcomes and defined risk levels at the point of entry.
These clarity attributes have catapulted the global structured investment market to USD $7 trillion.
Below are 2 recent case studies that highlight how Stropro clients use structured investments to achieve enhanced returns within predefined risk parameters.
Note: Stropro is not the product manufacturer of these products. We have several global investment banks on our panel and the issuer is clearly named in the product materials on the Stropro platform. Please refer to the risks outlined in the disclosure documents available on the Stropro platform. These examples have been provided as illustrations only. Past performance is not indicative of future performance. However, if you are interested in these strategies please speak to the Stropro team.
Case Study 1 — Bubble wrapping the ASX 200:
A family office approached Stropro and asked for an income product with a low probability of loss, the family was targeting conservative returns of between 5% — 7% p.a.
Solution: We identified a strategy used in Europe to extract yield from listed indexes. One of our issuers was able to apply the strategy to the S&P ASX 200. The investment provided a defined return of 6.9% p.a. and 35% downside barrier (the bubble wrapping) on the index. The downside barrier means that the investor’s capital is secure, if, in 5 years’ time the index is trading at 65% or above the current level. Over 20 years of backtesting, the strategy has never resulted in a capital loss.
Case study 2 — Bubble wrapping defensive equities
One of our corporate treasury clients was seeking a 12-month term and wanted to enhance their yield compared to the fixed income securities they currently held. They were curious as to what yield would be attainable on a basket of well known US consumer staple stocks with a 35% downside barrier.
Solution: We arranged an enhanced income strategy that provides a fixed return of 7.75% p.a. linked to 4 major US consumer staples companies: Colgate — Palmolive, Procter & Gamble, Walmart and Walgreens Boots Alliance. Invested capital is secure as long as none of the reference assets fall by more than 35% at maturity (12 months).
These case studies highlight two things. Firstly, ETFs are not always the best structure to achieve an investor’s objective, particularly if income and capital management are key objectives. Secondly, structured investments can provide better bubble wrapping and higher yield opportunities than ETFs.
Written by Ben Streater
This article has been prepared by Ben Streater. Ben Streater is Co-Founder and CIO of Stropro Operations Pty Ltd (ABN 28 633 603 399) (Stropro). This article is for educational purposes and is not a substitute for professional and tailored financial advice. This article expresses the views of the author(s) at a point in time, which may change in the future with no obligation on Stropro or the author to publicly update these views. This article uses information from sources the author considers to be reliable but does not represent that such information is accurate or complete, or that it should be relied upon. Past performance is not a reliable indicator of future performance. Investments may rise and fall in value and returns cannot be guaranteed. Stropro makes no representations or warranties, express or implied, as to the accuracy or completeness of the information it provides. Stropro Operations Pty Ltd (ABN 28 633 603 399) is a Corporate Authorised Representative (CAR №1293257) of Stropro Compliance Pty Ltd (ABN 74 640 214 740, AFSL №533443).