A buffer
against
loss –
Buffered ETFs are structured securities that offer a way to continue to invest with a potential for growth and a buffer against losses in volatile markets.
Offer downside protection
Buffered ETFs have the potential to act as a hedge against market losses.
Tax efficiency
hen used as a buy-and-hold strategy, investors may be able to take advantage of ETF tax benefits.
Constant liquidity
Buffered ETFs feature intra-day liquidity in addition to upside potential and downside cushions.
What are Buffered ETFs?
Buffered ETFs, also known as defined outcome ETFs, are a type of exchange-traded fund that aims to provide investors with a specified level of downside protection while allowing them to participate in a portion of the market’s upside potential.
These ETFs are designed to offer a predetermined buffer zone within which investors’ principal is protected against market declines.
- Buffered ETFs offer a unique balance between risk and reward.
- Buffered ETFs provide investors with a predefined buffer zone, which helps protect their principal against market declines.
- Market volatility can be unsettling for investors, but buffered ETFs can help mitigate its impact.
Buffered ETFs achieve their unique characteristics through the use of derivatives such as options contracts. These derivatives provide downside protection by establishing a predetermined level of protection, typically expressed as a percentage of the ETF’s net asset value (NAV). The buffer zone protects the investor from potential losses within that range, allowing them to keep a portion of their investment even if the market experiences a decline. If the market remains within the buffer zone, investors receive their principal back at the end of the defined outcome period.
Why Buffered ETFs?
Upside Participation...
While Buffered ETFs provide downside protection, they also allow investors to participate in the upside potential of the underlying market or index. The extent of this participation is defined by the ETF’s performance cap, which sets a limit on the maximum return an investor can achieve.
This performance cap ensures that investors share in a portion of the market’s gains while capping their potential returns.
Making the most of buffered ETFs
Buffered ETFs remain one of the fastest-growing financial products. In 2023, inflows surged nearly 80%.
Delivering the benefits of defined-outcome strategies with the advantage of an ETF wrapper can be an efficient solution to many of today’s investing challenges.