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What is Convexity?
Everyone wants to make the most of a good market. But no one wants to lose money. Unfortunately, that’s just not how investing works. For those concerned about the extreme ends of the market, convexity can be their friend.
Relative to a benchmark index, like the S&P 500 Index, a convex investment strategy aims to curve the return profile of a fund upward on both extreme ends of the benchmark’s performance. Upside convexity gives portfolios a boost in roaring bull markets with potential returns above the benchmark at the upper extremes. Downside convexity can help protect capital against the deepest bear markets, particularly when conditions just keep worsening, potentially curving upward the deeper in the red the market goes. The goal of convexity is to outperform the benchmark in extreme market environments.1 Some convexity strategies lean into convexity on one tail more than the other.
Sounds nice, right? But, remember, there is no free lunch.
In exchange for downside protection and upside enhancement, convexity usually lags in mild environments, producing lower payoffs when the benchmark has low positive and negative performance while remaining relatively correlated in “typical” markets.1
But how often do extremes really happen, anyway? They must be called “extreme” for a reason, right?
Not necessarily. During the 30-year period from January 1, 1993 to December 31, 2023, the S&P 500 Total Return Index produced rolling 1-year returns above 17% a whopping 31% of the time.2 Returns below -9% occurred 15% of the time.2 Extremes have occurred more often than people think.
So is convexity really worth it? It sounds complicated.
Deciding to pursue a convex investment strategy begins and ends with one’s investment goals, but it can benefit anyone who wants to make the most of big upward swings without investing too much money in high-risk assets.1 Because the strategy is managed by experienced professionals, they can help determine if convexity fits an investor's goals.
The TrueShares ConVex Protect ETF (PVEX) aims for potential convexity on the upside. It is designed to participate in the growth of U.S. large-cap equities* while aiming to cushion against significant market declines. On the upside, the fund aims to offer the benefits of partial U.S. large cap equity market exposure with the potential for meaningful capital appreciation approaching convexity. On the downside, the fund aims to mitigate against a meaningful portion of the risk posed by a decline in U.S. large-cap equity markets.
Convexity used to only be available to institutional investors,1 but with the growth of ETFs, convexity is now available to the public in more liquid, transparent, and tax-efficient products like PVEX.
Disclosures:
*The fund may not capture the full returns of the benchmark.
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