- Structured, or buffered, ETFs were introduced in mid-2018 and are growing more popular.
- The index-tracking strategies use options to limit investors’ downside in negative markets.
- Johan Grahn, Allianz’s head of ETF strategy, told Insider why they’re an appealing trade-off.
One day maybe bonds will get back to fulfilling their old role of delivering large amounts of steady, low-risk income and stabilizing portfolios in tough times. Until then, investors will have to get creative.
Since the middle of 2018, billions of dollars have flowed into a group of exchange-traded funds known as defined outcome, structured, or buffered ETFs. Investors who buy them are making a very calculated trade, giving up a shot at potential gains to limit possible losses. The tighter the downside caps, the less upside investors are able to get.
Here’s how it works: if the target for the ETF is a 10% loss and its benchmark — often the S&P 500 index — falls by up to 10%, investors won’t lose anything. If the market falls by 12% they’ll only lose 2%, and a 20% loss would be capped at 10%. On the other hand, in a positive market buffered ETFs can make money, but those gains are also capped.
