Defined-Outcome ETFs with a Convex Payoff Profile, Part II: The Downside-to-Upside Trade-Off

This article is the second in a two-part series introducing a new type of defined-outcome ETF with a convex payoff profile. These ETFs are designed to offer improved performance during significant market drawdowns and recoveries compared to existing defined-outcome ETFs with a concave payoff profile. In this article, we further analyze the downside-to-upside trade-off of convex and concave defined-outcome ETFs using the downside-to-upside performance ratio. Our historical analysis shows that both concave and convex defined-outcome ETFs exhibit similar downside-to-upside performance ratios. However, concave defined-outcome ETFs offer a superior trade-off during moderate market drawdowns and recoveries, while convex defined-outcome ETFs provide a better trade-off during deep market drawdowns and recoveries. These differences stem from their distinct payoff profiles.