BUFFER ETFS SEEK TO OFFER MANY BENEFITS, helping investors narrow the range of potential outcomes and enter equity markets with greater confidence. Given the large number of ETFs available, however, it can be challenging to determine where to begin and how to implement a Buffer ETF portfolio.
Here are three common ways Buffer ETFs are being utilized by investors:
Option 1: Static Allocation
Buy a single Buffer ETF at the start of its 12-month outcome period and hold through the entire outcome period to realize the defined outcome.
Potential benefits:
- Full starting outcome parameters are known
- Potentially achieve a defined outcome
- Simplicity
Example:
Purchase BJAN (Innovator U.S. Equity Buffer ETF – January) on December 31, 2022 with a starting cap of 25.06% and a 9% buffer. One year later, the reference asset (SPY) finishes the outcome period up 24.28%. BJAN delivers its defined outcome, providing a total return of 23.48% (net of fees) with 20% less volatility than SPY.
Option 2: Ladder on a monthly, quarterly or semi-annual basis
- Begin with 2, 4 or 12 Buffer ETFs, each with the same buffer level (9%, 15% or 30%).
- Equal weight your purchases.
- Systematically rebalance.
Potential benefits:
- Avoid the need to evaluate a monthly series of Buffer ETFs
- Maintain low volatility
- Diversified exposure
Example:
Invest 25% in PJAN, 25% in PAPR, 25% in PJUL and 25% in POCT.
Option 3: Opportunistic
Purchase a Buffer ETF with the desired buffer level (9%, 10%, 12%, 15%, 20% or more).
If performance exceeds predetermined positive or negative thresholds, rotate – “step up” or “step down” – into the Buffer ETF that is closest to the start of its next outcome period, providing a fresh buffer and new upside cap.
Potential benefits:
- Potential for outperformance compared to a static buffer strategy by attempting to capture gains in up markets and cutting losses in down markets
- Evaluate for opportunistic portfolio resets during the outcome period
- Provide a fresh buffer and new upside cap