The buffered outcome exchange traded fund suite may be the right type of strategy to consider as we transition to year-end and look to 2022.
In the recent webcast, Buffered Outcome ETFs: Participate in Markets, Prepare for 2022 Risk, Charlie Ripley, VP of portfolio management at Allianz Investment Management U.S. LLC, warned that the narrative for the market outlook is seeing some subtle shifts as the Fed recognizes that it needs to adjust policy sooner than it would have liked to. Specifically, GDP is expected to be above trend, but lower than 2021. Rates will rise faster in the front-end than the long-end, leading to a flatter curve. A less dovish Fed policy could lead to bond tapering ending in H1, with policy rate lift-off to follow. Meanwhile, inflation has reached post-GFC highs, and the transitory view is out the window.
Looking ahead, Ripley warned that consumer spending could slow, as income cannot rise at the same pace of inflation. Financial stability is an area of moderate risk as valuations in specific sectors became stretched. Additionally, inflation is becoming more persistent and requiring the Federal Reserve to act more quickly.
Brendan Cavanaugh, ETF product specialist at Allianz Investment Management LLC, also underscored the heightened concerns over uncertainty. According to the Allianz Q3 2021 Quarterly Market Perceptions Study, 78% of Americans expect inflation to get worse over the next year, 69% are worried that the increase in COVID infections will cause another recession, 54% worry that another big market crash is on the horizon (up from 45% in Q2), and $27.6 trillion in cash is currently on the sidelines with little to no growth opportunity.
“Allianz research indicates a heightened sensitivity to loss in the current environment. As a result, many investors may be underinvested in the market, and overallocated to cash with little to no growth opportunity,” Cavanaugh said.
Portfolio complexity and risk have increased over time as investors try to chase after harder-to-get returns. 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, now an investor is required to include 97% in growth assets to earn the same return of 7% 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 AllianzIM buffered outcome ETFs are “designed to bring the in-house hedging capabilities and track record of Allianz Investment Management LLC to the retail investor,” Cavanaugh said.
AllianzIM buffered outcome ETFs are a series of active ETFs 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 or create a cap by selling options or an in-the-money call option to finance the downside buffer.
Allianz Investment Management LLC more recently launched a new buffered outcome ETF with a six-month outcome period, the AllianzIM U.S. Large Cap 6 Month Buffer10 Apr/Oct ETF (NYSE: SIXO). AllianzIM’s new ETF seeks to match the returns of the S&P 500 Price Return Index up to a stated cap while providing downside risk mitigation through a buffer against the first 10% of S&P 500 Price Return Index losses for SIXO over a six-month outcome period.
AllianzIM will also expand this line of buffered outcome ETFs with the AllianzIM U.S. Large Cap 6 Month Buffer10 Jan/Jul (SIXJ), which is expected to come out in January.
Financial advisors who are interested in learning more about the buffered outcome ETF strategies can watch the webcast here on demand.