THE THREE MAJOR ISSUERS OF BUFFER ETFS, Innovator, First Trust and Allianz, all offer an ETF series each month that provides somewhat minimal downside protection, but typically with a very attractive upside cap. Innovator’s Buffer series provides 9% protection (the first 9% loss is protected) during the 12-month outcome period, and First Trust and Allianz offer ETFs with 10% protection. Allianz also offers 10% Buffer ETFs with a 6-month outcome period.
PGIM Investments, the global investment management business of Prudential Financial, launched its first Buffer ETFs in January 2024, with one series offering minimal downside protection of 12%, and another series offering moderate downside protection of 20%.
Why consider a Buffer ETF that offers minimal downside protection?
• You want some protection in the market from a correction, but a relatively high upside cap.
• You are not concerned about a major crash or bear market, but you would still like some downside protection.
• You want to swap your unhedged stock portfolio for some downside protection.
When to consider a purchase of a Buffer ETF with minimal downside protection?
Likely an ideal time to purchase a Buffer series that offers minimal protection, is if the stock market (the reference index you want to track) has already experienced a fairly meaningful decline. Let’s say we are in the middle of a bear market and the underlying index you want to track (e.g., S&P 500) is already trading down 20% from its recent peak. At that point you might be much more interested in participating to the fullest extent possible on the upside, whenever the market recovers, but you may also still want some downside protection. You could purchase a Buffer series that offers minimal downside protection, which would provide you with an additional amount of protection if the market continues to drop. Remember, the reference asset has already declined 20% from its recent peak, so if you purchase an additional amount of 9%, 10% or 12% protection, you’ve got protection potentially down to a pretty deep level from the prior peak. This would be enough protection to cover the average bear market decline from the prior peak.
Consider a swap from a deep buffer to a different series with less protection, but a higher upside cap.
Another strategy to consider is a purchase of a Buffer series that offers minimal downside protection if you currently own a Buffer ETF that provides deeper protection, and the market has already had a significant decline. The way options price within the ETF wrapper, typically means Buffer ETFs that provide moderate or deep protection, will have a beta (measure of volatility compared to the S&P 500) of approximately 0.5. So, if the reference asset is down 20%, early in the outcome period, it’s likely your Buffer ETF with moderate protection would show a loss of approximately half that amount, or 10%. So, if you currently own a 15% Buffer ETF and the reference asset has already had a serious decline, you could rotate to a 9% Buffer ETF, which would provide higher upside participation (a higher cap) whenever the reference asset recovers.
Note, the volatility of your Buffer ETF relative to its reference asset (beta) will change throughout the outcome period. Your Buffer ETF could track the reference asset more closely near the end of the outcome period, as the time value of the options within the ETF wrapper near expiration.
Consider a swap of your unhedged stock portfolio to a Buffer ETF series with minimal downside protection.
If you have an unhedged stock portfolio and you are considering reducing your stock exposure or selling out completely (for whatever reasons), you could compromise and remain invested, but with some protection. If you’d like to stay invested, but with slightly less risk, you could purchase Buffer ETFs that offer minimal protection, which would potentially reduce the volatility in your portfolio, and also provide you with some protection. This could be an attractive alternative to reducing your stock exposure, and it may provide you with some peace of mind that you didn’t have with your unhedged portfolio.
How much higher is the upside cap typically for the 9% series vs. the 15% series?
Innovator’s January 2024 Buffer series provides a good reference for comparison:
BJAN (9% protection) = 17.99% upside cap
PJAN (15% protection) = 14.20% upside cap
If you opt for the 9% level of protection, your potential upside participation is approximately 27% higher than the Buffer ETF that provides 15% downside protection. The less protection you purchase, the higher the upside cap. If the reference asset performs well during the outcome period, you would obviously participate more fully in the upside by owning BJAN, rather than PJAN. But, with BJAN you’re only protected on the first 9% loss (before fees) during the outcome period.
Minimal Downside Protection Buffer ETFs to consider:
Innovator U.S. Equity Buffer – Reference asset: S&P 500 (SPY)
Buffer: 9%, Outcome Period: 12 Months, Expense Ratio: 0.79%
BJAN Buffer 9% – January
BFEB Buffer 9% – February
BMAR Buffer 9% – March
BAPR Buffer 9% – April
BMAY Buffer 9% – May
BJUN Buffer 9% – June
BJUL Buffer 9% – July
BAUG Buffer 9% – August
BSEP Buffer 9% – September
BOCT Buffer 9% – October
BNOV Buffer 9% – November
BDEC Buffer 9% – December
FT Vest U.S. Equity Buffer – Reference asset: S&P 500 (SPY)
Buffer: 10%, Outcome Period: 12 Months, Expense Ratio: 0.85%
FJAN Buffer 10% – January
FFEB Buffer 10% – February
FMAR Buffer 10% – March
FAPR Buffer 10% – April
FMAY Buffer 10% – May
FJUN Buffer 10% – June
FJUL Buffer 10% – July
FAUG Buffer 10% – August
FSEP Buffer 10% – September
FOCT Buffer 10% – October
FNOV Buffer 10% – November
FDEC Buffer 10% – December
AllianzIM Buffer 10 Series – Reference asset: S&P 500 (SPY)
Buffer: 10%, Outcome Period: 12 Months, Expense Ratio: 0.74%
JANT Buffer 10% – January
FEBT Buffer 10% – February
MART Buffer 10% – March
APRT Buffer 10% – April
MAYT Buffer 10% – May
JUNT Buffer 10% – June
JULT Buffer 10% – July
AUGT Buffer 10% – August
SEPT Buffer 10% – September
OCTT Buffer 10% – October
NOVT Buffer 10% – November
DECT Buffer 10% – December
PGIM U.S. Large-Cap Buffer 12 – Reference Asset: S&P 500 (SPY)
Buffer: 12%, Outcome Period: 12 Months, Expense Ratio: 0.50%
JANP Buffer 12% – January
FEBP Buffer 12% – February
MRCP Buffer 12% – March
APRP Buffer 12% – April*
MAYP Buffer 12% – May*
JUNP Buffer 12% – June*
JULP Buffer 12% – July*
AUGP Buffer 12% – August*
SEPP Buffer 12% – September*
OCTP Buffer 12% – October*
NOVP Buffer 12% – November*
DECP Buffer 12% – December*
*April – December series will be launched throughout 2024.