Buffing Out Volatility, Part 2
Buffer strategies and 60/40 portfolios offer similar downside protection, but 60/40 outperformed over 5 years—highlighting the impact of high fees.
In a previous installment, we highlighted how investors looking to mitigate the impact of a falling equity market could use fixed income as a “buffer.” Today, we look at how this form of downside protection compares to buffered equity strategies.
Buffer strategies and traditional equity/fixed income allocations both aim to provide downside protection at the cost of upside participation. For example, compare the S&P 500 Index to either the Defined Outcome Morningstar Category or a 60/40 S&P 500 Index/Bloomberg US Aggregate Bond Index asset allocation. Both have tended to perform better than the S&P 500 when the equity market was down and lagged the S&P 500 when it was up. The tradeoff between upside participation and downside exposure is comparable whether using defined outcome strategies or a simple mix of stocks and bonds.
What’s not similar between these two approaches is the overall performance. Over the five-year period ending June 30, 2025, the 60/40 S&P 500 Index/Bloomberg US Aggregate Bond Index asset allocation returned 9.62% annualized, outperforming the Defined Outcome Morningstar Category’s 8.75% annualized return. High fees for these strategies can be a potential performance drag. True product innovation should lead to novel solutions, not just costly repackaging.
EXHIBIT 1
Defined Outcome Fund Performance
Growth of $1, July 2, 2020—June 30, 2025
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RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
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