Debbie Carlson
2 min read
Buffer exchange-traded funds offer ways to allow financial advisors to be as strategic or tactical as they want to be with their portfolios.
They also offer targeted ways for advisors to protect their clients’ portfolios when traditional markets become more correlated, ETF issuers say.
In the past five years, buffer ETFs have gathered $60 billion in assets and continue to grow. These ETFs use options to restructure risk, giving investors downside protection in exchange for some upside.
“You can know what your upside cap rate is, and you know what your protection level is, how many days are remaining, any time the market's open, and you can decide if that's a good trade for you or not,” said Jeff Chang, president at Vest, which offers buffer ETFs.
He spoke at a panel on buffer ETFs the Morningstar Investment Conference on Wednesday in Chicago.
Matthew Kaufman, head of ETFs at Calamos Investments, who also spoke on the panel, said buffer ETFs “can nail the risk tolerance that you're looking for” as financial advisors work with clients.
Buffer ETFs may not be appropriate for young, aggressive investors, but for people with more moderate risk tolerance or clients who are getting close to retirement, the funds are a way to use behavioral economic tools to keep them invested.
Chang said buffer ETFs offer hedging protection in 60/40 stock/bond portfolios because of their options use and are a liquid way to diversify risk. “If I buy the S&P and buy an S&P put, that put is perfectly negatively correlated to S&P. There is no question. It's like buying insurance,” he said.
Chang pointed to 2022 when both stocks and bonds fell as inflation increased and interest rates went up sharply. “What do you have in your client’s portfolio that is going to save them if 2022 repeats itself?” he asked.
Tim Urbanowicz, chief investment strategist at Innovator Capital Management, said buffer ETFs can give retirees portfolio protection but also growth from equities.
Retirees can’t afford drawdowns of 20% or 30%, he said. Instead of changing their portfolio from a 60/40 stock/bond allocation and moving it to a 20/80 allocation when they retire, buffers can help. “We're going to maintain that equity exposure, but we're going to do so using a buffer to make sure that you know that cash they need is going to be protected while still maintaining a growth,” he said.
