for many financial advisors the phones have been ringing off the hook this month as clients fret about sudden dips in their portfolios many of those clients are alarmed by necksnapping drops and surges as the dow jones industrial average ends the worst january since the 200809 financial crisis that kind of volatility can unnerve even the calmest investors indeed the vix index which is also known as the “fear index” a measure of volatility has moved up from the teens a few weeks ago and now hovers near 30 it’s highest reading in nearly a year of course volatility in itself is not always a bad thing—at least when markets are in a general uptrend “people tend to be most concerned with volatility when markets go down” says johan grahn who oversees exchangetraded funds etfs at allianz investment management grahn thinks markets may remain on edge in coming weeks and months as the federal reserve comes to grip with sustained inflation readings and the need for a series of interest rate hikes on wednesday the fed announced plans to both reduce the size of its bond holdings as well as boost the overnight lending rate this coming march as if on cue stock market indexes turned south once the news was digested that afternoon while the announcement was largely expected it did little to quell investor fears “the market feels that the fed is backed into a corner and they now have to act aggressively” says grahn adding that “there is now a sense that the fed will need to be a lot more aggressive than the market had been expecting” that’s quite a shift in sentiment in a short time back in december many wall street strategists assumed that inflation pressures would soon moderate and the fed would only raise rates on three occasions in 2022 or around 75 basis points a month later and there is now an 80 chance that the fed funds rate will be lifted by at least 100 basis points according to the cme group’s fedwatch tool with heightened uncertainty around inflation and interest rates “wheneverfed chair jerome powell makes public comments he will need to speak very carefully” adds grahn portfolio buffers grahn and his team at allianz launched a series of etfs in june 2020 that can help advisors and their clients sideswipe the worst impacts of volatile markets the etfs which are formally referred to as “buffered outcome” etfs mimic the approach used by structured notes such investments can help provide downside protection in falling markets yet are often riddled with opaque terms onerous fees and a degree of illiquidity in contrast allianz’s buffered outcome etfs are “fully transparent based on options contracts on the sp 500” says grahn “there are no hidden gimmicks what you see is what you get” each of the firm’s funds carries a 074 annual expense ratio which happens to be the average fee charged by activelymanaged etfs adds grahn and is a lower price than many structured note products offered outside of an etf wrapper as is the case with structured notes these funds can provide a hedge to longoriented portfolios and can also garner higher yields than plain vanilla bond funds investors can choose from among funds that provide protection against a 10 or 20 market downturn and offer a range of maturity dates for example the allianzim us large cap buffer20 jan etf azbj will hold its value even if the sp 500 falls 1520 by next january and if the markets fall beyond that amount the loss will be 20 percentage points smaller than an unhedged sp 500 fund of course investors may also be giving up some upside if markets rally sharply higher “if the market goes above the cap the fund will modestly underperform” the benchmark concedes grahn with a deep role in global insurance markets and the need to build massive portfolios with clearly defined risk guardrails it’s understandable that allianz would look to plant a flag in this area of a crowded etf field innovator capital management is another firm targeting the buffered or defined outcome etfs with a broader stable of such funds that tap into more specific niches such as small cap indexes bond indexes and international market indexes many of which carry a slightly higher 079 expense ratio with around 500 million in assets the innovator sp 500 power buffer etf january pjan is the largest in the category as clients ask their advisors to help devise ways to preserve gains accrued over the course of the longrunning bull market these market hedging etfs are bound to come into focus as we seem likely to be heading towards choppier trading sessions