Three Years of Innovation: The Rolling Buffered Notes

Downside protection in a portfolio is a key need for many clients. Whether simply due to a conservative investor approaching retirement (e.g., 55 – 65+ group) or views that the market may be long in the tooth after one of the longest bull markets in the last century, a strategy that provides some hedge to a negative market has an important position in a portfolio allocation. Equally important in both scenarios provided is the behavioral need associated. Investors approaching retirement are at a sensitive point in their investing period as their nest egg is most likely at its largest size with withdrawals to fund lifestyle choices around the corner. Perception of a late in the cycle equity position may shake some out of the market prematurely. A strategy that provides the necessary hedge as well as a level of definition is key in maintaining positions in the market.

One of the most popular strategies within the industry is the buffered note, which provides 1st loss protection to a specified level with returns up to a maximum cap on a referenced market, such as the S&P 500. Historically, advisors have used the product in a number of ways, including:

  • Core conservative equity position with satellite positions that are either more aggressive or conservative dependent on the client risk tolerance
  • Partial replacement of fixed income given the low yield environment
  • Replacement of alternative strategies such as market neutral, long-short and other hedge equity solutions that typically have less definition


In September 2014, Exceed partnered with Nasdaq in introducing a truly innovative approach to the structured notes market. With all material innovations, investors need the opportunity to kick the tires and understand how the product will actually work. Closing in on three years of live performance, we now have the opportunity to support some of the assertions provided early on with performance data.


Thoughts on Volatility and the Markets

As we leave 2016 behind and prepare for 2017, I wanted to share some of the themes we have recently been speaking and writing about. Over the last quarter, we penned four articles, appeared in three videos, and were quoted several times in additional articles.

Here are links to some of the aforementioned media spots:


The Benefits of Defined Outcome Investing, Nasdaq: A discussion on Exceed and the benefits of Defined Outcome investing

What is in Store for Markets in 2017, Voice of America: A read on VIX and what is in store for 2017 – one item discussed was whether VIX futures were pricing in too much complacency in the face of an elongated bull cycle and a new President with aims to disrupt existing political processes


VIX going into the elections

Last week I penned an article in the November issue of Investment Advisor (a ThinkAdvisor publication); the article discusses how the VIX communicates expected volatility over the next 30 days.

Although VIX is always an important indicator to watch, in early 2016 it has provided particularly keen insights leading up to the Brexit vote and now is doing the same for the U.S. election cycle.  As an FYI, VIX has jumped 50% in the last week (from 13 to 19), a sign of just how wild an election this is turning out to be. Interestingly, the VIX futures curve is partly in backwardation – both November and December expirations are closer to an 18 handle. This is communicating an expectation of higher volatility and uncertainty going into the election next week, with an expected lull in the action and hopefully more certainty thereafter.


Do Low Volatility Funds Actually Protect in Downturns?

Low volatility funds have been hot, hot, hot – the top two domestic based ETFs in the category, USMV and SPLV, now have over $20 billion in assets between them, of which $8 billion has come in during the last six months (40% of total AUM).

At first glance, this popularity is understandable: the concept is straightforward and logical, the pitch is compelling, and risk-adjusted performance has been strong.

However, neither ETF has gone through a significant market correction, so a real concern is that investors do not have a good grip on the potential downside risk of these strategies. Thankfully, the indexes that both ETFs follow either existed or were backtested (Is a backtest trustworthy? Sometimes! Learn more) prior to 2008, providing a glimpse of how these strategies should have worked in a past downturn as well as a basis to analyze how they may act in future downturns.