So I received this question from a reader recently:
Hi FH, thanks for the insights. Been a reader for sometime, I noted you have always focused on SG equities.
Would like to know your views passive investing in the US S&P as a core strategy? Thanks in advance!
Yes – Singapore stocks are a key focus on Financial Horse.
Yet in my personal portfolio, Singapore stocks form no more than 50% of my investment portfolio.
Of the remainder, a good chunk is invested in US stocks.
Why is that the case?
Why are US stocks a good buy for Singapore Investors?
The way I see it, the biggest benefit of US stocks is the upside potential.
US stocks in a good year, can provide significantly higher return than Singapore stocks.
S&P500 for example returned 21.9% in 2023 (STI returned 4.7%).
It wasn’t just 2023 – in much of the past 10 – 20 years, US stocks have by far outperformed any other market.
I’ve compared the S&P500 (candles) against the STI ETF (red), Hang Seng Index (Green), MSCI Japan (Purple) and MSCI Europe (Pink).
Nothing else even comes close.
The fact of the matter is that the US stock market is the deepest and most liquid stock market in the world today, and investors undoubtedly will want some exposure to it.
What is the problem with investing in US stocks?
The problem with US stocks though – is that the downside risk is very real.
In 2020 we saw a 33.9% drop in the S&P500.
In 2022 we saw a 25.4% drop.
That’s two >25% drawdown in less than 3 years.
Long story short, US stocks offer great upside potential – as long as you can stomach the downside risk when it comes.
This got me thinking.
What if there were a way to invest in US stocks for the upside, yet limit your downside risk?
This post is sponsored by Syfe. All views and opinions expressed in this post are from Financial Horse.
Syfe Protected Portfolios – Upside potential, while limiting downside losses?
Syfe recently reached out to me with exactly such a product:
“Protected Portfolios is Singapore’s first managed portfolio by Syfe that offers investors exposure to the S&P 500 while providing high-level protection against losses.
Investors can expect an estimated max loss protection of 2.8%* and an initial upside capped of 13.0%*.
Downside Protected S&P 500 lets you capture the upside potential of the S&P 500 while protecting against downside losses (in USD).”
How does Syfe Protected Portfolio work?
Syfe does a very good job of explain how the portfolio works (emphasis mine):
The Protected Portfolio has two key attributes – Estimated max loss(Est. max loss) and Current upside cap.
As the S&P 500 goes down, the losses of the Protected Portfolio will be limited to approximately the “Est. max loss” level. This keeps investors shielded from major losses even as the market falls. To keep the cost of this protection low, the Protected Portfolio introduces a “Current upside cap” on returns. This means that as the S&P 500 trends higher, the Protected Portfolio returns will initially be limited to the cap level.
What does this mean in practice?
Syfe gives a few examples of how this would work:
Negative Market: In a negative market when the equity market drops significantly, for instance, the S&P 500 drops by 20%, this Protected Portfolio would typically incur a loss of around 3%, protecting your investment from further declines.
Moderately Positive Market: In a moderately positive market, if the S&P 500 gains 10%, which is within the upside cap of 12%, this Protected Portfolio could potentially gain 5%, participating in the upside but at a slower pace than the index.
Very Positive Market: And in a booming market, where S&P 500 soars above 20%, this Protected Portfolio would likely achieve the upside cap of 12%.
What I like about Syfe Protected Portfolio?
Basically Syfe Protected Portfolio relies on ETFs using options hedging to reduce the downside risk.
But to keep the cost of the protection low – the trade off is that the upside on returns is capped initially, and the returns will not match the S&P500 exactly.
The examples above do a great job of illustrating how this works in practice.
But the real benefit here is the downside protection.
If the S&P500 drops 20%, that’s where the protection kicks in and the portfolio will only drop around 3%.
You’re basically sacrificing some of the upside potential, for the downside protection.
Downside protection can be worth its weight in gold
Here’s the chart of the S&P500 going back to 2018.
Yes, returns have been amazing during this period.
But look closer and you’ll find that there are certain periods that saw huge drawdowns:
- 2020: 33.9% decline in the S&P500
- 2022: 24.3% decline in the S&P500
In hindsight, you may think that a 33.9% drawdown is not a problem.
But when you’re living through it, I assure you it is anything but.
Logically your brain may tell you that this is a buying opportunity.
But emotionally – think back to how you felt in March 2020 when stocks were falling 10% in a day, and the whole world was shutting down.
It’s not a good feeling.
For certain classes or risk averse investors – eg. Retirees or those prone to emotional selling.
Such a huge drawdown would not be acceptable, and would cause undue stress.
And I think that’s where a product like this can come in.
Based on backtesting, Syfe Protected Portfolio would only be down a maximum of 2.7% during 2022 and 3.8% during 2020 based on backtested data.
That would have been very reassuring.
Potential drawbacks to note with Syfe Protected Portfolio?
That being said, there is no free lunch in this world.
The downside “insurance”, does come at a cost – being capped upside, and upside that does not track the S&P500 exactly.
For reference, here’s the S&P500 returns going back to 2012:
| Year | S&P500 returns |
| 2023 | 21.90% |
| 2022 | -13.04% |
| 2021 | 39.44% |
| 2020 | 8.39% |
| 2019 | 34.01% |
| 2018 | 0.15% |
| 2017 | 7.08% |
| 2016 | 15.63% |
| 2015 | 13.06% |
| 2014 | 29.14% |
| 2013 | 26.66% |
| 2012 | 13.76% |
Had you been invested in Syfe Protected Portfolio.
It would have been very helpful in years like 2022 and 2020 where we saw huge drawdowns.
But in some years like 2021 or 2023 where the returns were in excess of 20%, this protected portfolio would not have enjoyed the full upside.
That’s just the nature of how this “insurance” works.
Yes you limit your downside risk, but it comes at the cost of reduced upside.
But – the upside cap is revised regularly
The saving grace though, is that the cap level is revised regularly to ensure meaningful upside potential.
Here’s Syfe:
How often would the max loss and upside cap be revised?
Syfe would also periodically optimise the Protected Portfolio. This is one of the most unique features which not only allows investors to capture higher upside beyond the initial current upside cap but at the same time locks in and protects the portfolio gains.
The Est. max loss and Current upside cap could be revised:
- When Syfe initiates a re-optimisation, subject to your consent, as this is a non-discretionary portfolio
2. When options within the constituent ETFs expire and are rolled over to new options.
The full details of how this works are in their FAQs, and it’s basically about rolling over options based on where the S&P500 is trading.
But the net effect is that as the portfolio’s gains move closer to the current upside cap, Syfe will move the current upside cap upwards to capture more further growth, and at the same time reduce loss potential by resetting the protection levels higher.
Backtested returns for Syfe Protected Portfolio?
What are the returns like in practice?
Here are the backtested returns for the Syfe Protected Portfolio.
3 year annualised returns are 5.00% (less than the S&P500’s 8.3%).
But the real benefit comes when you look at the annualised volatility – a miniscule 3.50% vs the S&P500’s 17.3%.
And here’s the kicker – the max drawdown in 2020 was 3.8%, vs a monstrous 33.9% for the S&P500.
And the drawdown in 2022 was -2.70%, vs 25.4% for the S&P500.
Imagine if you were sitting through COVID with only a maximum 3.8% loss on your S&P500 while the rest of the world was falling apart – what a gamechanger that would have been.
Who is this Syfe Protected Portfolio for?
Syfe Protected Portfolio is a uniquely beneficial product – certain groups of investors would love it.
Whereas certain groups of investors may be better off buying a plain vanilla S&P500 ETF.
Here are some groups where I think the Syfe Protected Portfolio could be very useful:
1. Risk-Averse Investors – who want more upside than bonds, but less risk than stocks
The charts above tell you all you need to know.
Yes, annualised returns at 5% are lower than the 8.30%.
But the max drawdown in 2020 was 3.80% (vs S&P500’s 33.9%).
And the max drawdown in 2022 was 2.7% (vs S&P500’s 25.4%).
And annualised volatility is a miniscule 3.50% vs the S&P500’s 17.3%.
This makes Syfe Protected Portfolio akin to a less risky version of stocks, yet offering higher upside than bonds.
For investors who don’t want to take on too much risk with stocks, yet want more upside than bonds, this is an interesting alternative.
In fact the Syfe Protected Portfolio can be viewed as an alternative asset class to the traditional stocks and bonds.
You buy stocks for the uncapped upside potential, you buy bonds for the safety and fixed return, and then you throw in a Protected Portfolio for something in between – capped downside risk, yet with upside potential.
2. Investors uncertain about markets / macro
Let’s say you are a macro investor, and you’re worried about latest US economic data showing a weakening labour market.
You’re also worried that the Feds are embarking on a rate cut cycle, and over the past 30 years every rate cut cycle eventually culminated in a US recession (except for the 1995 cycle).
Yet you’re also concerned that if Trump wins the presidency in Nov, the economy may avert a recession and recover to all time highs.
In such a case – actually a product like Syfe Protected Portfolio can come in handy.
If the downside materialises via a US recession, your “insurance” will save the day.
If the upside case materialises, you do benefit from the upside.
Lock-in period, minimum investment amount and withdrawal fees?
There is no lock-in period or minimum investment amount for Downside Protected S&P 500.
You can withdraw your funds at any time with no withdrawal fees charged.
Syfe x Financial Horse Promo Code
From now until 30 September 2024,
- Enjoy 100% fee rebates for up to 6 months on Syfe’s Protected Portfolios
With Promo Code”DSPFH”
Applicable for new and existing users of Syfe.
Full T&Cs here: https://www.syfe.com/magazine/financial-horse-exclusive-syfe-protected-portfolios-promotion/
Syfe Webinar – Downside Protected Portfolio
Interested to learn more about Syfe Protected Portfolios?
Sign up for Syfe’s free webinar here: https://www.eventbrite.sg/e/syfes-protected-portfolios-capture-sp-500-growth-with-loss-protection-tickets-1007412827887?aff=financialhorse
Learn more about the portfolio and ask any questions that you may have to Syfe’s investment team.
*Tracking S&P 500 5-year historical performance which is approximately 15% annualised
Disclaimers
* Estimated max loss and current upside cap figures will vary depending on the time you invest in the portfolio. Estimated max loss is not guaranteed, and the portfolio may sustain a loss greater than the estimated max loss for a period of time due to market events. Portfolio performance may lag S&P 500 during certain periods. There is no guarantee that the portfolio will be successful in providing the sought-after protection in capping the losses or in achieving its investment objective.
This portfolio is provided on a non-discretionary basis; Syfe will only change the portfolio constituents and their allocation after obtaining your consent.
This portfolio comprises listed specified investment products and may not be suitable for everyone. Investment involves risks, including the risk of losing part of your invested amount. Refer to our Investment Strategy to learn more about the portfolio and key risks.
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. In fact, the content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stock broker or financial advisor.
All information obtained from third-party sources are obtained from sources believed to be reliable at the time of writing. Rates of returns are accurate at the time of writing.
This is a sponsored post by Syfe Pte. Ltd. Any opinion relating to the Syfe platform is from Financial Horse. This advertisement has not been reviewed by the Monetary Authority of Singapore.
