How can investors create resilient equity portfolios using ETFs?
Market volatility and the challenge it poses to meeting risk-adjusted return objectives
During times of uncertainty and market volatility, investors can often look to incorporate downside protection into their equity portfolios while staying invested in markets to capture opportunities.
This especially applies to Asia-based investors who will often have large US dollar, US equity and US treasury allocations as part of their investment portfolios.
As at the time of writing, year to date, equity market volatility has spiked, the S&P 500 Index has fallen -9.7%, the US dollar has fallen -8.6% versus major world currencies1, and the MSCI World ex-US Index has rallied 7.6% after a brief 5-day drawdown of -11.2%2.
Since the COVID pandemic, the MSCI World Index has rallied 144% cumulatively, or 19.9% on an annualized basis, through to February 2025 before falling -16.8% in less than 50 days.3
Investors seeking growth or income via equity exposures can capture such opportunities while also incorporating downside protection and resiliency to weather times of market stress, such as those described above, using ETFs.
Low cost, rules-based beta strategies
One of the most common ways of incorporating downside protection into equity sleeves is via style factor ETFs delivering low volatility and high-quality exposure. Such exposures can be incorporated into existing equity sleeves as complements to control for beta exposure and overall sleeve style factor profile.
Low Volatility ETFs
ETFs are available that track the S&P 500 Low Volatility Index, giving investors access to the 100 least volatile securities from the US equity market as defined by the S&P 500 Index.
Low volatility indexes could typically perform well during times of uncertainty and market volatility but lag the broader market during times of low volatility and market growth. Year-to-date in 2025, the S&P 500 Low Volatility Index has outperformed the S&P 500 Index cumulatively by 12.2%; however, over the past 7 years the Low Volatility Index has underperformed the broad market by -1.36% on an annualized basis.4
High Quality ETFs
ETFs also track the S&P 500 High Quality Index, which delivers exposure to high quality companies with healthy financials and low levels of leverage. During times of uncertainty, we believe holding resilient and fundamentally sound companies allows investors to stay invested whilst being mindful of risk.
Using the same computational intervals used for the low volatility returns, high quality exposure has delivered 4.3% of cumulative outperformance 2025 year-to-date versus the S&P 500 Index and 2.6% annualized outperformance over the past 7 years with lower levels of risk (16.4% volatility versus S&P 500’s 17.1% over 7 years).5
Investors could consider incorporating single factor ETFs with defensive natures into their existing portfolios to participate in markets while managing for drawdown risk and potentially achieve higher risk adjusted return outcomes versus the broad market.
Systematic active equity strategies
Investors could also consider outsourcing parts of their equity sleeves to active managers, such as through systematic active multi-factor global equity ETFs that target outperformance via optimizing complementary blends of value, quality and momentum style factors together whilst applying a low volatility filter to protect against drawdown risk.
Such a process can be implemented whilst maintaining sector and country constraints relative to a global equity benchmark like the MSCI World Index. One example of such a strategy has delivered 6.74% cumulative outperformance year-to-date relative to the broad market represented by the MSCI World index.6
These strategies combine defensive positioning with the power of factors and can benefit greatly during times of elevated uncertainty, ultimately aiming to provide a more stable return pattern through market cycles whilst providing downside protection in market sell-offs.
Core equity indices with systematic active option income overlays
ETFs are also available that have exposure to core, trusted indices such as the NASDAQ 100, S&P 500 Equal Weight and MSCI EAFE, whilst offering attractive monthly income and lower volatility than broad markets, enabled by conservatively managed option income overlays.
They might be of interest to investors seeking to stay invested in equities with an income advantage, no interest rate risk and lower volatility.
These strategies are designed to weather market uncertainty with built-in downside risk mitigation and consistent monthly income that can be collected in all market environments. They are always fully collateralized, and do not use leverage. During falling and flattish equity market environments, they have the potential to outperform broad markets thanks to the embedded structural downside cushion and steady income from option premiums. While they may not capture all the market upside during strong rallies, they can maintain significant market participation, especially when there is a mix of down, flat, and up markets over a full cycle.
An option-based ETF strategy tracking the NASDAQ 100 index outperformed the broad market in 2025 year-to-date by 3.51% with a 12-month yield of 8.61% versus the broad market yield of 0.67%7 and could be of particular interest to Asia-based investors seeking income.
Conclusion
Investors looking to incorporate resilience into their equity portfolios can do so simply and efficiently using a variety of low cost and transparent ETFs regardless of whether they are looking to re-shape their strategic asset allocations for a changing global economy or if they would like to take on tactical positions to capture perceived near-term opportunities.
Investment Risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
