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Buffered ETFs: A Comprehensive Guide

beebee
edited July 2022 in Fund Discussions
When Innovator launched the first defined outcome or “buffered” ETFs in August of 2018, I will admit I was a bit skeptical. Historically, ETFs that mirrored the kinds of outcomes long the province of structured products hadn’t been very successful at gathering assets. But I was hopeful: I believed then, and I believe now, that ETFs that shape the pattern of returns available in the risk markets are incredibly useful tools.

With over $4 billion in assets (half of that coming just this year), I think it’s safe to say my skepticism was unnecessary, and my enthusiasm rewarded. But with over 50 buffered ETFs available in the market now, we thought it would be useful to put together a guide to how the products work, how you might use them, and what’s available.
https://etftrends.com/buffered-etfs-a-comprehensive-guide/

Also,

Mentioned in this weeks Wealthtrack episode:

Linked Here

Comments

  • Sven
    Here is a list of buffered ETFs from the above article. The YTD performance would be interesting to track their upside as well as their downside.
    https://etfdb.com/themes/buffered-etfs/
  • msf
    edited July 2022
    As noted in the excerpted text ("long the province of structured products"), this sounds a bit like old wine in new bottles.
    Buffered ETFs vs Index-Linked Annuities

    There are differences including ETF-specific risks of "suboptimal [management] decisions" and difficulty in handling large cashflows (in or out). On the positive side, these are ETFs, not ETNs. So while they suffer those risks, unlike ETNs (or notes generally) they don't have the same counterparty risks as ETNs or annuities.

    There are investments comparable to index-linked annuities without the annuity wrapper: market-linked CDs and market-linked securities. They come in a wide variety of target indexes and risk profiles.
    https://www.morganstanley.com/structuredinvestments/docs/marketingmaterials/Introduction_to_Structured_Investments.pdf
  • Sven
    Thanks for your comments. I will study these products more throughly. There is no free lunch.
  • Observant1
    edited July 2022
    Barron's published an article about buffered ETFs this week.

    "Most issuers offer a monthly series of defined-outcome ETFs, with the outcome period typically starting on the first trading day of each month, although some offer quarterly products."

    "While the ETFs can be bought or sold at any time, to receive the advertised buffer and cap when the ETF resets, investors have to hold the fund through the full outcome period, which is typically one year from the day that the outcome period starts, says Bruce Bond, CEO of Innovator ETFs, which pioneered the strategy."

    "There are some caveats. The ETFs are significantly more expensive than the S&P 500 ETF or the Nasdaq-based Invesco QQQ ETF (QQQ), which annually cost 0.09% and 0.20%, respectively."

    "The biggest caveat are the funds’ upside caps; in strong bull markets, such as 2021’s, they will underperform. That’s seen in the return of the Innovator U.S. Equity Buffer ETF–January (BJAN), which had an outcome period of Jan. 1, 2021 to Dec. 31, 2021. This fund had a 15% downside buffer and a 15% cap.
    Its return was 14%, net of fees, versus the S&P 500 ETF Trust’s 2021 return of 27%."

    Link
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