Buffer ETFs Can “Fight the Fed” | ETF Trends

What’s next for the Fed? Despite the central bank’s rate hikes and Fed Chair Jerome Powell’s repeated calls for markets to understand the severity of inflation, the U.S. economy is still chugging along at a robust clip, highlighted by last week’s strong jobs report and near-record lows for unemployment. That may invite further rate hikes on top of a possible recession this year, factors that add to the case for buffer ETFs, according to AllianzIM head of ETFs Johan Grahn.

In many ways, buffer ETFs are the spiritual heirs to structured notes, but with the liquidity, flexibility, and tradability of the ETF wrapper. Buffer ETFs from AllianzIM, for example, come in two flavors — one set of 12 monthly ETFs with a 20% buffer against losses, in which investors only feel losses when one of the funds drops by more than 20%, and one set with a buffer of 10% instead of 20%.

The strategies are capped on the upside, in turn, but allow advisors sitting on cash to still participate in the market while remaining protected from quite a bit of loss. Last year, the S&P 500 lost nearly 20%, for example. In an environment in which the Fed may do some damage to markets this year with further hikes, that could be a valuable tool in advisors’ arsenals.

“You put a million dollars in on January 1, 2022. You only have $800,000 left if you’re in the S&P 500. If you invested in our buffer ETF, you would have kept a million,” Grahn said, speaking at VettaFi’s Exchange conference. “If you’re focused on wealth preservation, and at this point the Fed is focused on wealth destruction, it’s one easy way to fight the Fed, in a sense.”

Advisors with clients nearing retirement may find the guardrails in the structure appealing, Grahn suggested, with buffer ETFs also offering a simpler option compared to complicated alts investments. At the same time, while fixed income may be an appealing area again this year, buffered equities may have more juice.

One feature of the ETF wrapper is that some investors trade the buffer ETFs tactically, jumping in towards the end or start of a month to pick up some value before selling, and rolling over the new principal into the following month’s buffer ETF in a “laddering” approach. The strategies do come with the caveat that if the market rips upward, buffer ETF investors can only benefit up to 20% and 10%, respectively.

AllianzIM’s buffer ETF suite is actively managed, using options and collateral to establish buffers. The AllianzIM U.S. Large Cap Buffer10 Jan ETF (JANT), for example, charges 74 basis points and will hit its three-year mark this coming December. JANT has added $9 million over one month, returning 6.7% and outperforming its FactSet segment average of 6.2% in that time, as well.

Investors have a lot on their plates right now, and with the Fed looming over everything, it may be worth finding a strategy that can guard investors’ principal and still make use of cash. Buffer ETFs may be the approach to consider, with the suite from AllianzIM worth watching in the weeks and months to come.

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