Over the long term, most stock markets move up. But there are times when sharp declines inflict heavy losses on investors’ portfolio holdings. For example, in 2008 to 2009, U.S. stock markets declined by 51%; in 2020, they dropped by 34%; and in 2022, they fell 25%. Other markets globally had similar declines. What’s more, these types of sharp losses often persist for long periods of time.

Meanwhile, there are a range of ETFs that aim to help investors buffer their portfolios against significant losses. Here are three of those options.

As well, in the Supplement on page 120, we discuss the extent and frequency of major declines and the time needed to recover those losses.

GLOBAL X HIGH-INTEREST SAVINGS ETF $50.06 (Toronto symbol CASH; TSINetwork ETF Rating: Income; Market cap: $5.4 billion) invests in Canadian dollar-denominated, high-rate savings accounts with Canadian banks.

The risks involved with this investment are minimal but do include the counterparty risks of the institutions holding the deposits. In the case of the CASH ETF, the institutions currently holding the deposits are National Bank, Bank of Nova Scotia, and CIBC.

The ETF launched in November 2021; it charges an MER of 0.11%. Liquidity is excellent, with an average of $68 million in units changing hands daily.

The fund makes a monthly distribution, which depends on the number of days in the month and the interest rates received on the various deposits. The current annualized payment rate (based on the payment for September) is $2.10 for an annualized distribution yield of 4.2%. This will move down if the central bank decreases interest rates further.

Over the past year, the fund returned 4.4%. It has returned 3.8% per year since inception in late 2021.

We advise against switching “into cash” when the market hits a downturn. But if you have a large cash position, that doesn’t mean you need to rush or make snap judgments to get all your money into the market. Instead, take your time and weigh various investments to see which one is the best fit for the rest of your portfolio. And, in the meantime, the Global X High-Interest Savings ETF is a good place to hold that cash.

BMO US EQUITY BUFFER HEDGED TO CAD ETF $32.27 (CBOE Canada symbol ZAPR; TSINetwork ETF Rating: Aggressive; Market cap: $18.3 million) invests in large U.S. companies with the objective of providing capital appreciation while also protecting against downside risk. The U.S. dollar exposure is hedged to Canadian dollars.

The ETF invests in the BMO S&P 500 ETF and then uses derivative instruments to create the downside protection. The fund’s MER is 0.73%.

The ETF is set up to provide investors with a specified payoff profile starting on the first business day of October and then running over a 12-month period.

The net result is that investors will participate in the upward movement of the S&P 500 index until a pre-determined cap is reached. At the same time, downside is protected until the cutoff point is reached.

All in all, the downside protection comes at a cost—and given that we see the outlook for the U.S. market as very positive, the fund’s strategy may just limit your returns. As such, we don’t recommend this ETF.

BETAPRO S&P 500 VIX SHORT-TERM FUTURES ETF $7.76 (Toronto symbol HUV; TSINetwork ETF Rating: Aggressive; Market cap: $25.5 million) invests in the S&P 500 VIX Short-Term Futures Index. Returns are hedged to the Canadian dollar.

The CBOE (Chicago Board Options Exchange) Volatility Index is often referred to as the “VIX fear gauge.” This indicator aims to provide an estimated range of how much volatility the market will demonstrate in the next 30 days.

The objective of this ETF is to provide investors with protection against downside risk in their stock portfolios. When markets decline sharply, the volatility of stock price movements typically goes up, and that is reflected in an increase in the unit price of this ETF.

For example, between February 19, 2020, and March 23, 2020, the volatility of the S&P 500 Index increased from 15% to 83% while the S&P 500 Index declined by 34% and the TSX by 38%. Over the same time the unit price of this ETF increased by 720%. The ETF launched in December 2010 and has adequate liquidity. The MER is 1.15%.

The long-term performance of the ETF is poor although this is the result of the strong equity markets that generally prevailed over the past 15 years. But during periods of sharp market declines the ETF delivered strong gains—as was evidenced by the 720% gain in February to March 2020.

The math that goes into computing the VIX is based on academic studies of volatility. The VIX was created a few decades ago as part of a campaign to promote new forms of options trading, and it has succeeded. (Succeeded for the CBOE and the brokers, that is; for the options-players, not so much.) However, some hedge-fund operators, professional short-term traders and options-market makers see the VIX as one of many things that may be useful in their work.

The index picked up its “fear gauge” nickname along the way. This suggests a connection with declines in prices. But while, the VIX can provide a clue to volatility of the S&P 500 stock index in the next 30 days—to the speed and extent of price changes, up or down—it was never intended as an aid to long-term investing.

The BetaPro S&P 500 VIX Short-term Futures ETF may jump in a big market downturn and help to offset losses in your portfolio. We have a very positive view of the U.S. market, but if you think a U.S. stock collapse is coming, you’re better off moving out of U.S. shares altogether.