What do strategies that manage the short-term whipsaws on the market offer for long-term investors
“In the long run, we are all dead,” said John Maynard Keynes in his 1923 Tract on Monetary Reform, arguing for immediate action addressing short-term economic problems. The quote is sometimes used as a retort when arguments are made to focus on long-term returns despite short-term challenges. It’s a sentiment, though, that acknowledges the reality many clients face in a short-term downturn: immediate volatility is too much to bear and simply ‘staying disciplined’ and ‘focusing on the long-term’ isn’t enough for them to manage that stress. ETF issuers have noted that reality and, over recent years, the market has been saturated with products aimed at managing short-term volatility for clients.
While managing volatility is an inherently short-term goal, most investors will approach these ETFs with a medium to long-term view. The question arises, then, as to how these products perform over the longer-term. Along a spectrum of ETFs that reach from covered call option writing ETFs, to explicitly named “low-vol” ETFs, through a new class of buffer ETFs, these strategies are frequently marketed as a means of managing unforeseen pockets of volatility. Two executives, however, explained how those strategies can help advisors and clients realize value in the long-term.
“There have been really strong markets the last few years. The reality is that low vol hasn't done as well as your beta. But what low vol remains very good at doing is limiting your downside risk,” says Trevor Cummings, VP and Director, Lead of ETF Distribution at TD Asset Management. “So if you go back to the month of April, 2025 or you look at 2022 for example, which was a lot of bad for a long time, low vol does really well in those environments when the world is, you know, approaching panic or really uncertain outcomes.”
Cummings highlights an underlying behavioural benefit to strategies that can mitigate the downside, either by muting volatility or providing income that offsets moves to the downside. A single digit loss when the market is down by double digits is still not ideal, but may be far more bearable than a high beta strategy would be in that moment. As a result, that could help clients and advisors from succumbing to their own psychology and panicking.
Paul MacDonald argues that volatility offsets are inherent in all long-term investing. The Chief Investment Officer and Portfolio Manager at Harvest ETFs argues that if investors took a purely long-term focus and disregarded short-term volatility, then they might as well just buy the NASDAQ or the Magnificent Seven. The principles of diversification, he argues, are about offsetting volatility. ETFs that use options overlays to monetize volatility, or other strategies to mute it, can be seen as an extension of those other principles aimed at muting some volatility in favour of less exposure to more volatile segments of the market.
“The outcome of the covered call strategy is you end up with a lower beta and you end up with a lower realized volatility,” MacDonald says. “That's the trade-off for getting that cash flow. The benefits can be that you will get a bit of a smoother ride but you miss some upside capture.”
Because options premiums are positively correlated with volatility, options ETFs have become a popular tool marketed as a volatility offset. MacDonald and Cummings note that while this is true, different options strategies tend to have different outcomes. They both voiced support for more active management in covered call option writing, which gives managers freedom to adapt their write levels and either generate more options premiums or expose more of the portfolio to upside potential in the event of market volatility.
They both also highlighted the importance of using these products for the right clients. MacDonald stressed that while covered call ETFs can help offset volatility for anyone, those clients who want or need cash flow are arguably better suited to their use case. Cummings emphasized that behavioural side when discussing low-vol ETFs, noting that they can help soften the peaks and troughs of the market and generate a more emotionally stable response among clients.
Cummings emphasized the value of low-vol ETFs in a market where inflation and interest rate dynamics have created a higher degree of positive correlation between stocks and bonds. If fixed income can’t be relied upon to offset equity volatility as well as it had in the past, then he believes alternatives are required. He argues that these strategies can offer clients a similar level of return in the long-run, with less risk than a pure beta equity ETF. He notes that these strategies could prove especially useful for advisors as equity markets get more and more expensive.
“Some people do have a bit more fortitude. They are more prepared to endure the machinations, the gyrations of the markets, and hopefully they're compensated for that in the form of higher returns, but I think it bears having that conversation,” Cummings says. “I don’t want to suggest timing the market, but we had an amazing ’23, ’24 was a great market, ’25 is proving to be another great year. It doesn’t mean we’re overdue, but if this market is long in the tooth, it’s an interesting conversation to have. I think for a lot of advisors the low volatility conversation would be a new chat and a chance to present another idea.”
