Investors should consider the benefits of the buffered outcome exchange traded fund strategies that are designed to perform across a wide range of market scenarios.
In the recent webcast, Buffered Outcome ETFs: Beyond One-Size-Fits-All Risk Mitigation, Stephen Blumenthal, executive chairman and chief investment officer at CMG Capital Management Group, warned that investors face increasing risks in today’s markets, which are trading at historically elevated valuations. For example, over the past 57.5 years, the S&P 500’s median price-to-earnings ratio was 17.3, whereas the P/E was at 29.7 as of the end of August. He noted that when markets are trading at their bottom quintile, there is less risk and more reward. However, when in the upper or most expensive quintile, it is best to focus on risk management, and this is where we are today.
Brendan Cavanaugh, ETF product specialist at Allianz Investment Management LLC, noted that investors should be prepared for eventual market pullbacks. For example, since 1957, the S&P 500 Index return was negative 29% of the time, with negative returns exceeding 10% in nine years and negative returns exceeding 20% in three years. Investors, though, need to balance risk exposure in their ongoing search for higher returns.
“To potentially achieve a 7.0% return today, investors may have to maintain a much more complex portfolio than they did 30 years ago to generate the same return,” Cavanaugh said.
Cavanaugh explained that back in 1991, an investor’s portfolio could be 98% in cash and 2% in fixed income to generate an expected 7% return with a standard deviation of 1.1%. In comparison, an investor is required to include 97% in growth assets to earn the same return of 7.0% in 2021, but this more complex mix of growth assets could come with a standard deviation of 17.3%.
As an alternative way to maintain market exposure and better-manage downside risks, Cavanaugh highlighted Allianz’s suite of Buffered Outcome ETF strategies, including:
- AllianzIM U.S. Large Cap Buffer10 Jan ETF (AZAJ)
- AllianzIM U.S. Large Cap Buffer20 Jan ETF (AZBJ)
- AllianzIM U.S. Large Cap Buffer10 Apr ETF (AZAA)
- AllianzIM U.S. Large Cap Buffer20 Apr ETF (AZBA)
- AllianzIM U.S. Large Cap Buffer10 Jul ETF (AZAL)
- AllianzIM U.S. Large Cap Buffer20 Jul ETF (AZBL)
- AllianzIM U.S. Large Cap Buffer10 Oct ETF (AZAO)
- AllianzIM U.S. Large Cap Buffer20 Oct ETF (AZBO)
“The buffer ETFs launched are primarily for investors that are, simply put, looking to manage risk with the potential for more confidence in a liquid product, and the main investor profile does not surprisingly include individuals that are either nearing or in retirement,” Cavanaugh said.
Cavanaugh explained that the ETFs are designed to bring the in-house hedging capabilities and track record of Allianz Investment Management LLC to the retail investor. The Allianz Buffered Outcome ETFs are a series of actively managed and transparent funds that participate in the growth potential of an equity index to a cap and provide a level of risk mitigation with a downside buffer.
The Buffered ETFs provides index exposure to match the S&P 500 Index returns for a certain range of returns through a synthetic 1:1 exposure to the S&P 500 Index. The ETFs also create a buffer by buying options through a put spread that provides buffers of 10% or 20%. Lastly, the strategies establish a cap or create a cap by selling options or an in-the-money call option to finance the downside buffer.
“In general, reducing risk by reallocating an equity position is one of the most common use case and speaks directly to the need for our aging population to take risk off the table as they become more conservative with their investment portfolios over time,” Cavanaugh said.
“We also see advisors that are using buffered ETFs in place of a portion of their fixed and equity assets in a diversified portfolio, and some advisors that incite hesitant clients to move cash off the sidelines and back into the market,” he added.
Financial Advisors who are interested in learning more about the Buffered Outcome ETF strategy can watch the webcast here on demand.