Displaying items by tag: buffer ETFs

As market volatility rattles investors, many are turning to “buffer” ETFs—funds that trade off some upside potential in exchange for protection against downside risk. These ETFs, which use options strategies to cap losses while limiting gains, have drawn $4.7 billion in inflows so far this year, with a notable $140 million coming in on the S&P 500’s worst day of 2024. 

Financial advisors are increasingly adopting them to reassure clients and keep them invested during turbulent times, especially as traditional stock valuations remain high. The appeal lies in downside protection, though investors must accept lower upside caps and higher fees—some charging more than ten times what plain index ETFs do. 

Assets in buffer ETFs surged to $64 billion by February, up from $38 billion at the end of 2023, as their defensive qualities grow more attractive in an uncertain economic and political climate. 

Finsum: Some advisors warn against overcommitting, reminding investors to balance protection with realistic expectations about long-term growth and costs.

ETF issuers are continually innovating to meet the demand for buffer strategies, appealing to financial advisors and clients who prioritize downside protection, even if it limits potential gains. Often dubbed "boomer candy" for their popularity among retirees, buffered ETFs offer a sense of security akin to a safety net for nervous investors. 

The market for these ETFs has grown exponentially, with over 200 options managing nearly $46 billion in assets, a significant leap from just $200 million in 2018. These strategies typically shield against initial market declines, like the first 10%, while capping upside returns and are often tied to indices like the S&P 500. 

Variations now include funds offering complete downside protection or innovative approaches like Calamos Investments’ product, which protects bitcoin’s price, but caps gain at 10%. 

Finsum: Investors looking for stability particularly as they are aging could benefit from these strategies. 

Innovator Capital Management has launched a new ETF targeting the Russell 2000, adding to its Managed Floor suite. This ETF offers small-cap exposure with a built-in downside cushion, limiting potential losses to around 10% over a rolling 12-month period. 

Unlike traditional defined outcome ETFs that lock in a fixed downside and upside cap, this fund employs a laddered options strategy for more flexibility and dynamic risk management. As volatility looms due to uncertainties around the election and interest rates, the fund aims to attract investors who are cautious about small-cap risks but still want exposure. 

This move capitalizes on increased investor interest in small-caps while addressing concerns about potential market downturns. Ultimately, Innovator's strategy is designed to provide both growth opportunities and a safeguard against significant losses.

Finsum: Small caps can outperform in a falling rate environment and this could be a great option for new buffer ETF investors. 

This year, the focus on managing downside risk in portfolios has become crucial, particularly with the looming presidential election, anticipated Federal Reserve rate cuts, and global geopolitical challenges. 

Buffer ETFs have gained traction as a solution, offering a combination of market participation and capital preservation in a straightforward, single-ticker format. These ETFs cater to varying time horizons, allowing investors to tailor their protection strategies accordingly. As more product providers enter the Buffer ETF space, it's essential to conduct thorough research, as the specific design and strategy of each ETF can significantly impact outcomes. 

Innovator ETFs, a pioneer in this category, recently introduced Managed Floor ETFs, which differ from defined outcome ETFs by offering ongoing protection without limiting the potential for market gains. These newer ETFs provide greater flexibility, making them suitable for continuous integration into portfolios rather than being tied to specific time frames like some other strategies.

Finsum: The fees can be a critical issue with these products so manage to understand exactly how the product will pay off to take full advantage of the strategies. 

For those who find the pain of losing money more intense than the pleasure of making a profit, there are defined-outcome or buffered ETFs. These funds, which cap potential gains in exchange for limited losses, have gained popularity since their debut in 2018. Now numbering around 270 with $47 billion in assets, these ETFs surged in interest after poor market returns in 2022.

Buffered ETFs cater to conservative investors, including those nearing retirement, who want to stay invested in the stock market while minimizing risk. Typically offering protection for a set period, usually a year, they limit potential upside in return for a cushion against losses. Major financial firms like Innovator, First Trust, AllianzIM, and Fidelity offer these funds.

Though complex, requiring thorough explanation, these ETFs are mainly used by financial advisors for their clients, presenting a balanced investment strategy by offering various levels of risk and reward to suit different needs.

Finsum: When the probability of volatility is high a buffer ETF can be a great natural hedging solution.