Displaying items by tag: buffer ETFs

BlackRock has introduced a 'buffer' ETF, the iShares Large Cap Max Buffer Jun ETF (ticker: MAXJ), designed to offer a 100% downside hedge for cautious investors. This ETF tracks the S&P 500 using options with an upside cap, aiming to protect against losses for about a year.

 Buffer ETFs are beneficial as they help maximize returns while providing downside protection during volatile market periods. 

They are especially attractive to investors wary of market volatility and economic uncertainties, such as inflation and potential interest rate hikes. BlackRock's extensive reach and marketing capabilities could help it catch up with competitors in this space.

Finsum: BlackRock’s pioneering in quantitative strategies puts them in a good position to maximize the abilities of buffer ETFs

Buffer ETFs have grown rapidly since 2018, now totaling 159 with nearly $38 billion in assets. They attract financial advisors by offering downside protection for the first 10% to 15% of losses while allowing market gains, making them popular during volatile periods like 2022.

Experts point out that these ETFs are easier to rebalance and offer daily liquidity compared to structured notes and annuities. However, buffer ETFs cap potential gains, limiting profits when the market rises, and their performance can be affected by market timing.

They typically have a defined 12-month outcome period, and buying or selling mid-series can negate initial protections and caps. Despite their benefits, buffer ETFs have higher fees and might not pay dividends, making them less suitable for long-term investors compared to direct equity investments.

Finsum: Sometimes it’s worth paying higher fees or sacrificing a little alpha to hedge some volatility

PGIM, the investment management arm of Prudential Financial, launched two new laddered funds of buffer ETFs: the PGIM Laddered Fund of Buffer 12 ETF (BUFP) and the PGIM Laddered Fund of Buffer 20 ETF (PBFR) on the Cboe BZX. These ETFs offer U.S. large-cap equity exposure with limited downside protection and an upside cap on appreciation. 

BUFP invests equally in 12 PGIM U.S. Large-Cap Buffer 12 ETFs, while PBFR invests in 12 PGIM U.S. Large-Cap Buffer 20 ETFs. These funds, the lowest-cost buffer ETFs in the market with a 0.50% net expense ratio, aim to help investors navigate market volatility. 

Buffer ETFs provide the advantage of downside protection during market declines but come with the disadvantage of capped gains during market rallies.

Finsum: Lowering the costs of buffer ETFs could be wildly beneficial particularly when they seem so well poised for our current environment. 

In the past two years, retirement investors have funneled over $20 billion into US exchange-traded funds (ETFs) that limit both gains and losses, challenging traditional insurance products. These "buffered" ETFs capitalize on derivatives to cushion the effects of extreme market swings and have grown popular since their 2018 debut, especially after the market turbulence of 2020 and 2022.

The draw of buffered ETFs lies in their downside protection, which has become increasingly attractive to investors seeking to safeguard their retirement savings. Financial advisers in the US have embraced these ETFs, driving $10 billion in net inflows in both 2022 and 2023, while taking market share from the $3.3 trillion annuities market and costly structured notes.

This has grown not only the size but the scope of the market with 200+ defined outcome ETFs in the US, totally a staggering $37bn. In turn new competitors like BlackRock and AllianceBernstein are joining the competition to try and capitalize on the gains from First Trust and Allianz. 

Finsum: The uniqueness of buffer ETFs really is in how they integrate derivatives to drive performance and outcomes and can present nearly all in one solutions. 

Innovator Capital Management, a pioneer in defined outcome ETFs, announced the launch of a groundbreaking ETF designed to provide investors with exposure to the equity market while ensuring a complete buffer against losses. The Innovator Equity Defined Protection ETF aims to match the upside return of the SPDR S&P 500 ETF Trust, symbolized by SPY, with a cap of 16.62%, while safeguarding against losses from SPY over a two-year outcome period.

Graham Day, the Chief Investment Officer, emphasized the surge in investor interest towards safer options like bank deposits and Treasuries amidst market concerns, hence the necessity for a low-risk market reentry strategy. Innovator's objective with the new fund is to offer clients a means to remain invested in the market with robust risk management, extending their buffer ETF range, which previously spanned buffer levels from 9% to 30%.

Since introducing the world's first buffer ETFs in August 2018, Innovator has witnessed competitors such as First Trust and, more recently, BlackRock, entering the fray with their versions. While the new strategy may not immediately entice investors due to its slightly higher risk and cost, Innovator anticipates competition with traditional cash-like instruments, highlighting the potential tax advantages alongside increased upside potential and complete downside protection.

Finsum: A full 100% buffer could be a major innovation in the risk mitigation space for ETFs.