Buffered Outcome ETFs Help You Stay Invested, Manage Risk

Investors worried about oscillating markets can risk- and volatility-reduction ETFs to safely diversify a portfolio.

“AllianzIM Buffered Outcome ETFs may reduce the impact of market volatility by helping to mitigate investment performance outliers,” Brendan Cavanaugh, ETF Product Specialist, Allianz Investment Management LLC, said on the recent webcast, Risk and Reward: Strategies for Volatility in a Low Rate Environment.

Cavanaugh pointed out that it is not always smooth sailing for the equity markets. For example, since 1957, the S&P 500 Index return was negative 29% of the time, with negative returns exceeding 10% in 9 years and negative returns exceeding 20% in three years.

“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.

According to Allianz research, 57% of investors believe they need to accumulate more retirement assets but are too nervous to invest in the market. About 61% of investors are keeping money out of the market to protect it from loss. Around 54% admit they are keeping too much out of the market. Due to this more conservative viewpoint, $26.5 trillion in cash is currently on the sidelines with little to no growth opportunities.

“Gone are the days of a simple, safer portfolio mix. 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 pointed out 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:

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 AllianzIM 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 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

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 creates a cap by selling options or an in-the-money call option to finance the downside buffer.

“Each fund continues indefinitely. When the end of the Outcome Period is reached, the fund automatically begins a new Outcome Period. The new Outcome Period will have a new Cap that is based on current market factors and may be higher or lower than the previous term,” Cavanaugh added.

There are a number of ways to incorporate the Buffered Outcome ETF strategies into a diversified portfolio. Cavanaugh explained that an investor can reduce their portfolio’s volatility by de-risking their equity position. The investor can also increase their return potential by diversifying a traditional allocation by repositioning a proportionate share of a balanced portfolio to potentially help increase equity exposure and preserve risk targets. Additionally, a Buffered Outcome ETF can help the investor stay invested if they shift cash off the sidelines, which would increase their market exposure up to a cap, while maintaining a level of risk mitigation.

“In partnering with Allianz at the launch of these Defined outcome ETFs, Halo believes these products fit a unique niche in the defined outcome space, for those concerned with credit risk, liquidity and difficulty with selection of product, this suite of defined outcome ETFs are exactly the right tool to come out at a time where advisors are looking for packaged solutions in an efficient wrapper,” Joanna Kanakis, Head of Enterprise Sales, Halo Investing, LLC, concluded.

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