Riding the rally while also playing defense

With U.S. equities climbing higher on the strength of a small group of mega-cap technology names, financial advisors are weighing how to stay invested while preparing for the possibility of a sudden reversal. That dilemma is increasingly steering them toward buffered exchange-traded funds, according to Charles Champagne, head of ETF strategy at Allianz, who spoke with InvestmentNews at Schwab IMPACT in Denver. 

Champagne said the backdrop of the past three years has been a powerful, yet uneven, run for equities. The current bull market has produced strong returns, but advisor conversations are now dominated by concerns over the narrowness of the rally. 

“A lot of the bull market is being driven by that AI component,” he said. “Not all the components of the S&P 500 are in that same bull market that you may be seeing at the top driving those returns.” 

That divergence is prompting advisors to consider strategies that allow clients to participate in continued gains without taking on the full downside risk of the market. “Our products all offer downside protection on equity markets,” Champagne said. “As advisors are thinking about what the markets may do… that’s where these products can really play a strong role.” 

A central appeal, he stressed, is eliminating the impossible task of timing the market. “Timing in the markets is extremely difficult,” he said. “With a buffered ETF, you can have that protection to rely on, but you can also participate in the equity market. If you’re not correct on the timing of that market correction, you still have that equity exposure, but you know when you need defense, it’s there.” 

Advisors shape future products 

Champagne noted that the firm’s latest innovations stem directly from advisor feedback. “The early iterations of these products were buffer with cap, and the feedback that we saw, particularly in ’23 and ’24, was they don’t want to cap their upside. So we came to market with a suite of uncapped buffered ETFs,” he said. These offer “15% downside protection and unlimited upside opportunity beyond a spread or hurdle rate.” 

Advisors also requested greater flexibility, with billions of dollars sitting in cash awaiting clearer signals. That led the firm to launch a full-protection ETF with a quarterly reset. “If they want to move from cash to the equity markets, they have a vehicle that they can do it with,” he said, adding that the structure allows advisors to “pivot quickly” rather than wait through a full year-long outcome period. 

Champagne’s final message to advisors: Don’t let today’s market strength obscure the need for risk controls. “Make sure you implement some type of hedge or protection into your portfolio before you need it,” he said, “because it will pay off very much so when the markets do end up coming down and correcting.”