In equity markets, the question of how best to deal with market corrections remains a recurring topic. Those who remain fully invested bear the risk of significant losses. Those who, on the other hand, reduce their equity allocation risk missing a subsequent recovery.

Asset manager Fidelity International wants to ease this trade-off with a new generation of active exchange-traded funds (ETFs). With the Fidelity Global Equity Dynamic Buffer UCITS ETF and the Fidelity US Equity Dynamic Buffer UCITS ETF, the company has launched two investment products designed to cushion losses during moderate market declines.

Since the end of October, the two ETFs have also been tradable on the Swiss stock exchange SIX.

Equity investments with a built-in risk buffer

The concept combines two different approaches. On the one hand, the funds rely on Fidelity's research-enhanced strategy, in which stock selection is based on in-house research and quantitative methods. On the other hand, a systematic options strategy is used. It is intended to reduce the portfolio's susceptibility to volatility and limit losses during moderate market declines.

Unlike traditional equity ETFs, which track a benchmark index as closely as possible, the new products pursue an active investment approach with additional risk management. The two funds differ in terms of their investment universe: while the Global Equity Dynamic Buffer ETF invests in equities of developed markets worldwide, the US version focuses on the American stock market.

No guaranteed capital protection

The term "buffer" is likely to create expectations among safety-conscious investors. However, caution is warranted. Fidelity explicitly emphasizes that the targeted loss buffer is dynamic and adjusts over time to market developments. A specific level of protection is not guaranteed.

This means that the funds can mitigate price losses, but by no means eliminate them. In the event of severe market selloffs, investors may still suffer substantial losses. Participation in rising equity markets is also not unrestricted. Options strategies used for hedging can weigh on performance and, depending on the structure, reduce some of the upside potential.

For investors, this raises a key question: how much return potential are they willing to give up in order to reduce the risk of interim price losses?

More safety comes at a price

There are also ongoing costs. Both Fidelity products have an annual total expense ratio of 0.50 percent. That makes them significantly more expensive than many traditional passively managed equity ETFs. Investors are paying not only for stock selection, but also for the additional risk management.

Whether these higher costs pay off will depend largely on future market developments. In a prolonged phase of rising stock prices, traditional ETFs could have the edge. In a volatile market environment, however, the loss buffer could prove valuable. The crucial factor will be how reliably the strategy works in different market phases.

Competition for structured products?

For the Swiss financial center, the development is also interesting for another reason. Investment products that combine participation in equity markets with a certain degree of protection against price losses have long been part of the offering from structured product issuers. Buffer ETFs address a similar investment need, albeit within the regulated UCITS ETF structure.

The payout profiles differ significantly. While structured products often work with predefined conditions, barriers and maturities, the new Fidelity funds pursue a dynamic hedging strategy. A direct comparison would therefore be misleading. Nevertheless, such ETFs could in future provide an additional alternative for investors who want to manage equity risk more precisely.

Fidelity expands ETF business

The launch is part of a broader push by Fidelity International in the European ETF market. At the beginning of October, the asset manager already introduced new Equity Enhanced Yield ETFs, which are designed to generate additional income using options strategies.

With the two Dynamic Buffer products, Fidelity's active ETF offering now comprises 30 funds. The expansion is taking place in a market in which more and more asset managers are trying to transfer traditional active investment strategies into the exchange-traded fund structure. For Fidelity, this is about more than just launching additional products. The asset manager wants to reach new investor groups with active ETFs and position itself in an increasingly competitive European market.