Key Takeaways
- • April 2025 saw the steepest losses for the S&P 500 and S&P/TSX Composite amid tariff-driven selloff; the S&P 500 fell 12% from April 2 to April 8 (5,671 to 4,983) before recovering to 5,569 by month-end, a 4.57% monthly loss in Canadian dollars.
- • Nine Canadian buffer ETFs outperformed their reference S&P 500 in April, with losses ranging from 0.5% (BMO US Equity Buffer Hedged to CAD ETF – July ZJUL) to 1.4% (FT Vest US Equity Buffer ETF – May MAYB.F), versus nearly 5% for the Vanguard S&P 500 Index ETF VFV.
- • Second Engine's 11 liquid alternative indexes, managed in association with Picton Mahoney, returned between -0.4% (Equity Long Short) and -1.7% (Multi-Strategy) in April, with Global Macro down 4.6% and Event-Driven up 1.0%.
- • Morningstar's US data for Feb. 19 to April 8 shows only equity market neutral strategies positive (1.58%), while the Morningstar US Market index fell 19.14% over the same period, with equity alternative categories providing solid downside protection.
- • Morningstar analysts advise buffer ETF investors to buy at inception and hold the full outcome period (typically one year), as later entry may forfeit protection.
Summary
Alternative mutual funds and ETFs, marketed as sources of diversification and portfolio protection, were tested during the tariff-driven selloff of April 2025, according to Morningstar. April produced the steepest losses for both the S&P 500 and the S&P/TSX Composite. The S&P 500 slid 12% in the week of April 2 to April 8, falling from 5,671 to 4,983, before recovering to 5,569 by month-end. That left the index down 8.7% year to date and produced a 4.57% monthly loss in Canadian dollars. The S&P/TSX Composite dropped 11.00% in the first week and finished April down 0.97%, or 1.40% for the year.
Buffer ETFs, which use call options to offer a defined return band in exchange for downside protection with capped upside, performed as designed, according to Morningstar manager research analyst Lan Ahn Tran. Nine Canadian buffer ETFs outperformed their reference S&P 500 in April, with losses between 0.5% and 1.4%, while the Vanguard S&P 500 Index ETF (VFV) lost just under 5%. Tran cautioned that protection depends on entry timing: investors who buy after inception may receive only partial coverage, so buying at inception and holding through the usually one-year outcome period is preferable.
Liquid alternatives showed more uneven results. Second Engine, a subsidiary of Picton Mahoney, tracks 11 liquid alt indexes, and their April returns fell between the S&P 500 and S&P/TSX paths. The Global Macro Index declined 4.6%, while the Event-Driven Index gained 1.0%. Year to date through April 30, about half of Second Engine's indexes beat the S&P 500, and only the Event-Driven Index (up 2.4%) beat the S&P/TSX Composite.
Jason Kephart, senior principal of multi-asset strategy ratings at Morningstar, reported similar patterns in the United States. Between Feb. 19 and April 8, only equity market neutral strategies were positive (1.58%) among the nine categories Morningstar tracks, while the other categories lost between 0.87% (relative value arbitrage) and 10.22% (long-short equity). Equity-side alternatives nonetheless provided substantial downside protection relative to the Morningstar US Market index's 19.14% decline over the same period. Kephart noted that liquid alternatives, unlike buffer ETFs, are uncapped on the upside but have shown limited participation in market rebounds. Their portfolio impact depends largely on whether they are used as substitutes for stocks, bonds, or cash.
Robert Wilson, head of innovation and portfolio strategist at Picton Mahoney, recommended selecting liquid alternatives according to investor goals. Long/short equity funds may reduce equity risk, long/short credit funds may reduce bond-related risk, and merger arbitrage or market neutral equity funds may lower correlation with stocks.
Buffer ETFs, which use call options to offer a defined return band in exchange for downside protection with capped upside, performed as designed, according to Morningstar manager research analyst Lan Ahn Tran. Nine Canadian buffer ETFs outperformed their reference S&P 500 in April, with losses between 0.5% and 1.4%, while the Vanguard S&P 500 Index ETF (VFV) lost just under 5%. Tran cautioned that protection depends on entry timing: investors who buy after inception may receive only partial coverage, so buying at inception and holding through the usually one-year outcome period is preferable.
Liquid alternatives showed more uneven results. Second Engine, a subsidiary of Picton Mahoney, tracks 11 liquid alt indexes, and their April returns fell between the S&P 500 and S&P/TSX paths. The Global Macro Index declined 4.6%, while the Event-Driven Index gained 1.0%. Year to date through April 30, about half of Second Engine's indexes beat the S&P 500, and only the Event-Driven Index (up 2.4%) beat the S&P/TSX Composite.
Jason Kephart, senior principal of multi-asset strategy ratings at Morningstar, reported similar patterns in the United States. Between Feb. 19 and April 8, only equity market neutral strategies were positive (1.58%) among the nine categories Morningstar tracks, while the other categories lost between 0.87% (relative value arbitrage) and 10.22% (long-short equity). Equity-side alternatives nonetheless provided substantial downside protection relative to the Morningstar US Market index's 19.14% decline over the same period. Kephart noted that liquid alternatives, unlike buffer ETFs, are uncapped on the upside but have shown limited participation in market rebounds. Their portfolio impact depends largely on whether they are used as substitutes for stocks, bonds, or cash.
Robert Wilson, head of innovation and portfolio strategist at Picton Mahoney, recommended selecting liquid alternatives according to investor goals. Long/short equity funds may reduce equity risk, long/short credit funds may reduce bond-related risk, and merger arbitrage or market neutral equity funds may lower correlation with stocks.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.