pacifica-beach-coastline-californiaMore than $10 trillion is invested in exchange-traded funds (ETFs) worldwide. The transparency of the ETF investment vehicle has made it appealing to investors for all portfolio sizes. Daily liquidity, tax efficiency, lower fees, and transparency, make it highly utilized.
Since 2018 Buffer ETFs have become one of the fastest growing segments of the ETF marketplace. Over 200 Buffer ETFs now trade on U.S. exchanges and they have attracted more than $35 billion in assets. These ETFs track a major stock market index over a defined outcome period (typically 12 months) while offering downside protection, known as a “buffer.” Investors can participate in the upside of the stock market, to a predetermined cap.
At the end of the outcome period (reset date), Buffer ETFs automatically roll to the next outcome period, in a tax-efficient manner, with fresh downside protection and a new upside cap. Therefore, Buffer ETFs are suitable as long-term investments in both tax-deferred and taxable accounts.
If you would like to participate in stock market gains, to a cap, but with much-needed downside protection, Buffer ETFs may be a perfect fit for your portfolio.
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Buffer ETFs track various major stock market indices, so you need to choose your reference asset for the outcome period. Most Buffer ETFs track the SPDR S&P 500 ETF Trust (SPY), but if you want to track the Nasdaq-100 (QQQ), Russell 2000 (IWM), or foreign indices (EEM, EFA), they are also available for purchase.
Most Buffer ETFs have a defined outcome period of 12 months, but there are also quarterly and semi-annual resets. Choose the outcome period that best fits your market outlook, time horizon, and risk profile.
Buffer ETF issuers typically offer downside protection of 9%, 10%, 15%, 20%, or more. So, you need to decide how much protection you would like during the outcome period.
Buffer ETFs are typically offered with annual reset dates. So, depending on when you are ready to purchase your Buffer ETF, invariably many will already be in the middle of an outcome period, which means the potential outcome parameters will be different than they were on the reset date. Typically, you will want to buy a Buffer ETF in the final hours of trading on the day before the new outcome period begins, so the timing of your allocation will likely depend on the date when you are ready to construct your portfolio. Thankfully, with so many Buffer ETFs to choose from, there is a Buffer ETF that resets every month, so you never need to wait long for a reset date to come around.
Before making a Buffer ETF purchase, it’s critical you check the potential outcome parameters on the issuing company’s website. The parameters will change throughout the trading day, so it’s important to know the parameters (downside risk and upside potential) before entering an order.
You can view the reset dates and potential outcome parameters for any Buffer series on the issuing company’s website. Visit www.allianzIM.com, www.ftportfolios.com, or www.innovatoretfs.com, for more information.