Use These New Buffer ETFs to Limit Losses During Uncertain Times

Buffer ETFs are typically actively managed ETFs that provide investors with a buffer against market downturns. Under the hood, these ETFs employ some version of a put-spread collar.

The put-spread collar consists of four parts:
 

• A long, deep-in-the-money call position, providing market exposure
• A long put to hedge against downside risk
• A short out-of-the-money call
• A short put is further out-of-the-money than the long put

The result is a zero-cost put-spread collar because the two short positions net out the cost of the hedge.

Most buffer ETFs have two numbers on their name, such as 5/20 or 0/15. The first number is the amount you will lose in a market decline up to that number, while the second is the end of the protection zone, where the buffer ETF matches losses. So, for example, a 5/20 buffer ETF means you’ll lose 5% before buffering takes place until a 20% market decline.

The cap on returns depends on several factors. For example, most buffer ETFs attempt to establish net zero-cost positions, which impacts how much upside they need to sacrifice to achieve downside protection.

The S&P 500 index is down nearly 16% since January, leading to a lot of red across investment portfolios. Moreover, while inflation is trending lower, the 7.7% annualized rate (for October) is still sharply higher than the Fed’s 2% target rate. And a global inverted yield curve suggests that a recession is coming both in the United States and around the world.

Buffer ETFs enable investors to stay in the market without assuming all downside risks. Instead, they can invest in a 5/20 buffer ETF (or another option) that limits their downside in all but the most severe market crashes. That way, they can still capture any upside and avoid holding cash, which loses value in inflationary environments.

When investing in buffer ETFs, remember that the buffer begins at the launch date and resets periodically. As a result, you may not have the total promised buffer amount if you invest after the launch date. And, of course, if the buffer ETF rises after the launch date, you may not have much upside potential left, leading to potential opportunity costs.

Large-cap equities have been among the hardest-hit asset classes over the past 52 weeks. Except for energy companies, most sectors have significantly dropped in value since January, leaving few portfolios unharmed in the process. As a result, investors may want to consider large-cap buffer ETFs to protect against further losses.

AllianzIM recently launched two new actively managed large-cap buffer ETFs:
 

• The AllianzIM U.S. Large Cap Buffer 10 November ETF (NVBT) provides a buffer of 10% with a cap of 26.75% gains with a November reset date.
• The AllianzIM U.S. Large Cap Buffer 20 November ETF (NVBW) provides a 20% buffer against loss with a 16.90% cap and a November reset date.

The funds have an expense ratio of 0.74%, making them more expensive than conventional ETFs. However, these amounts are in line with other buffer ETFs, such as the Innovator U.S. Equity Buffer ETF November (BNOV) with its 0.79% expense ratio.

Buffer ETFs provide investors with a cushion during an economic downturn. AllianzIM’s newly launched large-cap November buffer ETFs offer a fresh reset after the market’s decline earlier this year along with a lower expense ratio than many competing funds. As a result, investors may want to take a second look during these uncertain times.

Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.