Welcome to Extreme Investor Network, where we provide unique and valuable insights into the world of investing. Today, we’re diving into the world of buffer exchange-traded funds, also known as defined-outcome ETFs.
Investors are increasingly turning to buffer ETFs for protection against market downside. These funds use option contracts to provide a buffer against losses, giving investors some peace of mind. However, this downside protection comes with a trade-off – investors may have to give up some of the upside potential of the index.
While buffer ETFs have gained popularity in recent years, they are still a small slice of the overall industry. Assets have grown significantly, reaching $36.9 billion as of April 2023. These defined outcomes are set at the beginning of the period and only apply at the end of the outcome period, providing investors with a sense of security.
Investors who are close to retirement or already retired are particularly drawn to buffer ETFs as they seek to preserve capital to fund their lifestyles. However, those with a longer time horizon may want to carefully consider the trade-offs involved.
So how do buffer ETFs work? Managers use a combination of equity options to build the fund, creating a defined buffer against losses. This buffer varies by product and can protect against a certain percentage of the index’s loss while capping returns beyond a certain point.
Innovator Capital Management is a pioneer in the defined-outcome ETF space, with competitors like PGIM, Allianz, and BlackRock following suit. Recently, Calamos announced a new product line of 12 ETFs that offer 100% downside protection, appealing to investors looking to save cash for a defined period or retirees seeking to outpace inflation without downside risk.
When considering investing in buffer ETFs, there are several factors to keep in mind. You’ll need to decide how much protection you want on the downside, as this will impact your upside cap. Timing is also crucial – it’s best to buy the ETF on the first day it’s available and hold onto it until the underlying options expire.
While buffer ETFs offer a sense of security, investors should be aware of the higher fees associated with these products compared to traditional ETFs. Additionally, investors do not receive dividends from the underlying stocks, further impacting potential returns.
Before diving into buffer ETFs, it’s important to understand the firm offering the ETF. Some established firms like JPMorgan, BlackRock, and AllianceBernstein have experience with options and a solid reputation. Conducting due diligence on the provider can help investors make informed decisions.
At Extreme Investor Network, we provide in-depth analysis and insights to help investors navigate the complex world of investing. Stay tuned for more valuable information and tips to help you make informed investment decisions.
