Defined outcome and buffer ETFs proved their value in the 2022 bear market, but an unclear market outlook for 2022 could make it a bit more complicated for investors to access funds. Buffer ETFs — offered by several firms including First Trust, Innovator, and Allianz — were a winning strategy for investors in 2022. The funds work by combining broad market risk with an options strategy that caps potential upside in exchange for investor protection. from price pullback. The funds are typically offered in series, with one for each month, as the strategies are designed to work over a full 12-month period. For example, an investor who bought a January ETF with a 20% buffer in early 2022 would have ended the year close to flat, despite a large market decline. “We needed 2022 to drive attention to our products. And they did what we said they were going to do,” said Trevor Terrell, head of distribution at Innovator ETFs. But in the early weeks of 2023, there has been a bullish trend in the market. This creates underperformance for funds that rebalance in January, as defined outcome funds tend to lag during market volatility, especially when they are several months after their derivatives contracts expire. And if the rally continues above the cap, the fund could be in for a terrible year. The rally also creates downside risk for investors, because the buffer applies to where the market was when the fund was rebalanced, not when an investor bought a share of the fund. One way for investors to remedy this problem is to switch to a fund that has recently been rebalanced, which will move the buffer floor and cap levels up. Using hypothetical numbers, Johan Grahn, head of ETFs at Allianz Investment Management, said, “If you bought on Jan. 1 and the market went up 5%, you probably got 2.5%.” “Feb 1 is coming up, you can dump Jan 1, lock in that 2.5% and now you have a new buffer starting Feb 1, and a new cap that expires over the next 12 months.” Will happen.” To be sure, this strategy can create tax penalties for investors, just like other forms of short-term trading. Innovators have ETFs that will do this rotation for investors within the same fund, such as the Buffer Step-Up Strategy ETF (BSTP), although the fund’s expense ratio is high and investors lose some of the certainty of defined-outcome strategies. The BSTP fund is even smaller, with about $30 million in assets under management, according to FactSet. The success of buffer funds last year could lead to a variety of defined result strategies coming to market soon. Nick Elward, head of institutional products and ETFs at Natixis Investment Managers, said his firm is exploring adding similar products to its lineup. “I think it’s kind of prophetic for investors and advisors to know that they have option overlays that can protect against very significant downside, and in some cases generate some more income as well,” Elward said. One potential growth area is what the innovator calls accelerated ETFs. For example, the Innovator US Equity Accelerate 9 Buffer ETF (XBJA) is designed to provide investors with a range of multiples of market returns plus a 9% buffer. According to FactSet, the fund has nearly $50 million in assets under management, with more than $30 million in inflows this year. “We’ve also seen a lot of interest in our accelerated products. I don’t think anyone is calling for a crazy year of double-digit returns. What better way to do that than with an instant type of product,” Terrell said.
Source: www.cnbc.com
