S&P Dow Jones Indices, in collaboration with Milliman, has introduced a series of managed risk 2.0 indices that provide core equity strategies with an embedded risk-management feature. The key features of this strategy are the following.
• Cost of the protection embedded in the strategy is stable and is financed through a reserve asset, the S&P U.S. Treasury Bond Current 5-Year Index. During times when equity markets are under stress, the correlation effects between equities and the reserve asset class have historically provided a counterbalance through positive returns. This is in contrast to strategies that use cash, which do not provide that benefit.
• Since protection is available, the strategy may provide the ability to participate more in the upside while keeping the overall risk at a low level. This shows up in the higher upside capture and similar or better downside capture than other risk-managed strategies.
Before diving into the details of the construction and performance of the strategy, it is helpful to consider why this strategy has been developed and the potential benefits it can provide.