Remain Invested, Hedge Downside Risk with Buffered Outcome ETF Strategies

Investors can utilize targeted ETF strategies to stay invested in the markets while having a buffer against any further downside risks.

In the recent webcast, How to Mitigate Risk in Turbulent Times, Gene Goldman, CIO and director of research at Cetera Investment Management, noted that the Federal Reserve’s monetary policy has dominated the current market outlook, with the mortgage purchase applications near their worst levels during the aftermath of the financial crisis and the housing market being the first Fed domino to fall.

Johan Grahn, head of ETF Strategy at Allianz Investment Management LLC, noted that investors are on edge, and many exhibit heightened sensitivity to loss in the current environment. Specifically, he pointed out the latest Allianz research revealed 65% of investors wish they had more of their retirement savings protected from the market, given recent market volatility. About 59% are looking to add more protection to their portfolio after the recent market correction, and 66% wish they could have locked in their gains during recent market highs. Meanwhile, $29.5 trillion in cash is currently on the sidelines with little to no growth opportunity.

Amid these volatile market conditions and heightened risk events that threaten market stability, investors could consider alternative options to mitigate risks in their investment portfolios while keeping their toes in the markets. Grahn argued that as an alternative way to maintain market exposure and better manage downside risks, investors could turn to Allianz’s suite of buffered outcome ETF strategies, including:

Grahn noted that investors will inevitably face downside risk with their equity exposures, so it is better to manage the risk exposure when maintaining a stock market position. Specifically, over the period from 1957 through 2021, the S&P 500’s annual index return was negative 28% of the time.

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.

The buffered outcome 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.

Grahn explained that the AllianzIM Buffered ETFs ultimately allow clients to stay invested. Additionally, they provide a level of risk mitigation with a downside Buffer, participate in the growth potential of the S&P 500 to a cap, and rebalance at end of an Outcome Period with a new cap.

Financial advisors who are interested in learning more about the buffered outcome strategy to manage risk can watch the webcast here on demand.