Investors flock to buffer ETFs as assets soar to record highs
- Defined-outcome ETFs rose from $2 billion to $47 billion in assets between 2020 and 2021, reflecting their growing popularity.
- These funds use option contracts to mitigate losses on underlying indices, with various protection levels offered.
- Successful performance may depend on market conditions, making these investments suitable primarily for conservative investors or those nearing retirement.
In 2020, defined-outcome exchange-traded funds (ETFs) experienced significant growth, increasing from approximately $2 billion in assets to around $47 billion by 2021, according to data from Morningstar. These funds utilize option contracts to provide a safeguard against market losses, targeting common indices like the S&P 500. They are designed to deliver defined outcomes at the end of a specific period, leading to potential underperformance in bullish markets but offering enhanced protection during downturns. Investment firms, such as BlackRock, responded to growing demand by launching various buffer ETFs with different protection levels. The iShares Large Cap Moderate Buffer ETF protects against the initial 5% of losses over calendar quarters, while the iShares Large Cap Deep Buffer can offer protection from a 5% to 20% loss range. Investment strategies involving these products appeal particularly to risk-averse investors or those nearing retirement, due to their ability to provide a degree of stability in volatile markets. Market analysts noted increased interest in buffer ETFs among investors wary of a potentially inflated market. The concentration of growth within a few top companies has fueled concerns of an impending market correction, prompting individuals to seek investments that offer a hedge against significant losses. These conditions have encouraged investors to allocate more resources into such protective investment vehicles as they navigate uncertain economic climates. Despite the advantages these funds offer, it remains essential for investors to thoroughly understand the inherent costs and limitations associated with defined-outcome ETFs. Returns may be capped, which means while losses could be mitigated, earnings might not reach their full potential during strong bullish runs. Investors are advised to evaluate their objectives and risk tolerance carefully before committing to buffer ETFs, balancing their desire for reduced volatility against the potential for limited upside.