A New Online Platform to Limit Investment Losses

Vest Financial Group couldn’t have timed it better. A day before the latest stock market dive began the company introduced its “Vest Protective Strategy,” offering investors and advisors a way to hedge downside risks of individual stocks and ETFs via an online platform.

“Since the announcement we’ve had traffic we hadn’t seen before,” says Karan Sood, co-founder & CEO of Vest, explaining that the product was available in beta for advisors before the official launch on Aug. 18.

Vest’s protection product uses options contracts to hedge market risk at a price level that the investor chooses. For example, an investor owning Apple (AAPL) stock, now trading near $107 a share, could choose a strategy that protects against the stock falling to $75 a share or to $50 a share, or even zero. The cost of the protection — the premium — increases as the price target declines, and the downside protection, therefore, increases.

Investors can hedge individual stocks or ETFs that they already own or create a new position in a stock or ETF along with the downside protection using the actual underlying securities or synthetic versions created with options.

“In most cases the synthetic version is more cost effective — less transaction costs,” says Sood.

Advisors can also create entire leveraged portfolios using the Vest platform. The platform also allows investors to leverage the upside of a particular stock or ETF one, two or three times.

Once the investor or advisor chooses the particular parameters of the downside protection they want — and possibly the upside cap — they will see an explanation of all the particulars of the strategy they have just purchased.

Vest currently offers protection on 700 stocks and ETFs “across the universe,” says Hood. The cost is a 50 basis point (0.5%) annual fee plus the transactions costs to buy the options and stocks. Vest, which is a registered investment advisor, works with several brokers including TD Ameritrade to do the trading and is currently working to add its offering to existing platforms of brokerage firms.

Vest is marketing its product as an easy, transparent way for investors and advisors to hedge portfolios compared to buying individual options, but it isn’t the only option.

Randy Frederick, managing director of trading and derivatives at Charles Schwab, in a recent note suggested several strategies that investors can use to limit risk in a volatile market, including stop loss, stop/limit, trailing stop and bracket orders. They essentially limit losses to a specific level (stop) that investors choose so long as they’re executed, but that is not always the case.

“In a rapidly falling market, or a market that gaps in price overnight, there is no guarantee that the order will execute or that the execution prices will be the same price as the stop price,” writes Frederick.  Limit orders offer additional protection because “they allow you to set a minimum price you’re willing to accept when selling a stock” and “a maximum price you’re willing to pay when buying a stock,” writes Federick, but again he warns that there is no guarantee of an execution.

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A New Online Platform to Limit Investment Losses