BUFFER ETFS FIRST STARTED TRADING ON U.S. EXCHANGES with Innovator’s launch in 2018. Innovator repackaged the appeal of structured notes and annuities – with their ability to offer downside protection and upside participation in the stock market – in an ETF wrapper. The ETFs are liquid, transparent and tax efficient. It was brilliant.
I started tracking Buffer ETFs in 2020 because I thought they could be very attractive for my clients. Most of my clients are either retired or nearing retirement, so the idea of some level of downside protection was very appealing. My clients get plenty of downside protection and they can also participate in stock market gains, to a cap. The ETFs are liquid with no lock-up periods or surrender charges. It was indeed a very innovative idea.
I did a lot of research prior to investing and it took me a while to get comfortable with Buffer ETFs and to find an opportune time to invest. I interviewed employees and strategists at various leading Buffer ETF firms. I also interviewed sub-advisors of the ETFs. I wanted to talk to the individuals who actually managed the option strategies within the ETFs. The more I learned, the more comfortable I felt about investing for my clients.
During the market selloff in 2022, when both stocks and bonds were hit hard, I believe I did a good job managing risk for my clients. I had a lot of cash on hand in the fall of 2022 and I was considering where to reinvest. Valuations were decent, but stocks weren’t cheap and there was a lot of pessimism given how poorly the market had performed that year. I viewed the pessimism as healthy, and I knew all the negativity could help stocks surprise to the upside in 2023. Still, I wasn’t willing to make an unhedged “bet” on the market – I wanted some protection.
I had been checking the upside cap levels of Innovator’s Buffer ETF offerings and was particularly intrigued by its 15% Power Buffer series as November approached. The market was already down nearly 20%, so adding another 15% layer of protection was very appealing to me. At that point, the additional “buffer” would basically protect my clients from a very deep peak-to-valley decline in the market.
The 20.5% upside cap for Innovator’s U.S. Equity Power Buffer ETF – November (PNOV is the trading symbol) on its reset date, October 31, 2022, was nearly the highest I had ever seen for a 15% Buffer ETF. PNOV offered 15% downside protection and my clients had the potential to make 20% during the 12-month outcome period. If the market performed well in 2023, they would participate nicely in the gains. And, if stocks had another bad year, my clients had plenty of protection in place. What’s not to like? I thought it was a tremendous risk vs. reward opportunity, so I went “all in.”
My first purchase of PNOV on October 31, 2022, and another purchase of Innovator’s U.S. Equity Power Buffer ETF – September (PSEP) the next day, represented approximately 70% of my assets under management, and nearly all of the available cash. I had no concern about entering sizeable orders in these ETFs due to the underlying liquidity of the option contracts (SPY) within the ETFs. The bid-ask spreads were tight and execution on both trades through the institutional trading desk at TD Ameritrade was flawless.
Since my first dive into the Buffer ETF space, I’ve had nothing but positive feedback from my clients. They love the fact that they can participate in stock market gains to a cap, and know they have a defined level of downside protection in place too. Quite frankly, many of my clients may never want to invest again in the stock market without some level of protection, and I understand why.
