Buffered Outcome ETF Strategies to Mange Risks in an Environment of Rising Rates, Inflation

As investors consider where the markets are headed, they can also consider buffered outcome exchange traded fund strategies to help mitigate any further risks and still remain invested even in today’s challenging market conditions.

In the recent webcast, Q&A with Mohamed El-Erian: Outlook for the Second Half of 2022, Dr. Mohamed El-Erian, chief economic advisor for Allianz Group, has highlighted persistent risks such as elevated inflationary pressures and troubles the Federal Reserve faces when tackling this runaway inflation that threatens the economic outlook ahead.

Consequently, companies now face questions about growth. For instance, more Wall Street banks and analysts are warning of an increased probability of a recession ahead as the Fed aggressively tightens its monetary policy to wrangle decades-high inflation levels.

The Fed now faces an issue over its credibility. The central bank has already showed that it is willing to enact multiple interest rate hikes to head off the challenges in inflationary pressures. However, by regaining its credibility in its fight against inflation, the central bank risks turning the economy into a recession or hitting the brakes and allowing economic growth to run rampant.

The real question that investors face today is whether or not they can safely find a path toward growth while properly handling inflationary pressures, especially with an aggressive Fed that is late to the game, trying to play catch-up to fight against elevated consumer prices.

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’s 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. They are designed to bring the in-house hedging capabilities and track record of Allianz Investment Management LLC to the retail investor.

Cavanaugh explained that the new strategy helps clients mitigate risk and lower volatility, participate in the growth potential of an equity index up to a cap, provide a level of risk mitigation with a downside buffer, and automatically resets at the end of the outcome period.

The buffered ETFs provide 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.

Additionally, SIXO and SIXJ follow a six-month outcome period. The ETFs seek 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 the S&P 500 Price Return Index’s losses over a six-month outcome period for new adopters or short-term money, tactical advisors.

Financial advisors who are interested in learning more about managing risk ahead can watch the webcast here on demand.