With the launch of its first two buffer ETFs today, iShares is poised to help expand the pool of advisors managing risk better in a volatile market. Given their broad industry leadership and scale, we expect these products to be a success.
Buffer ETFs, also known as defined outcome ETFs, seek to participate in the upside of an investment approach, like large-cap U.S. equities using options while buffering a set level of loss over an outcome period. The ETFs reset at the end of the outcome period but can be held indefinitely in a tax-free manner.
Buffer ETFs Have Been Around Since 2018
Innovator ETFs was the first firm to launch buffer ETFs in August 2018, and has experienced success. The firm’s assets under management doubled to $11 billion in 2022 due to $5.7 billion of net inflows and as many of the flagship defined outcome products lost far less money than a traditional index-based ETF approach. Growth has continued and as of late June 2023, Innovator had $14 billion in assets.
See related: Graham Day Talks Defined Outcome ETFs
Others, including Allianz and First Trust, have previously offered a series of buffer ETF products. The established products are mostly focused on 12-month time horizons and use options on third-party ETFs.
See related: Johan Grahn on Buffered ETFs
iShares Buffer ETFs Are Focused on Quarterly Downside Protection
The iShares buffer ETFs use options to seek to track the share price return of the iShares Core S&P 500 ETF (IVV ) up to an approximate upside cap, while mitigating market downturns by seeking to provide an approximate buffer against IVV losses within target ranges. The iShares Large Cap Moderate Buffer ETF (IVVM ) aims to protect against the first 5% of quarterly losses. Meanwhile, the iShares Large Cap Deep Buffer ETF (IVVB ) seeks to protect against quarterly losses ranging from 5-20%.
“Last year served as an important reminder that diversification alone may not protect investors against downside,” explained Mark Alberici, Head of U.S. Product Innovation and Development at iShares. “Today, there is records amount of cash on the sidelines as heightened recession risk and uncertainty around interest rates continues to challenge investors. IShares buffer ETFs are designed as buy-and-hold strategies, helping investors stay invested across all market cycles.”
Buffer ETFs are Different than Minimum Volatility ETFs
IVVM and IVVB are different than the firm’s other ETFs focused on risk management. For example, the iShares MSCI USA Min Vol Factor ETF (USMV ) invests in stocks that have lower volatility characteristics than the broader market. The presumption is that these stocks, like Eli Lilly and McDonalds, will hold up better going forward.
“Despite both strategies seeking to reduce risk, buffer equity ETFs offer a unique value proposition of offering a more precise downside protection range, unlike the long-only equity Min Vol strategies,” noted Alberici.
We think BlackRock’s entry into the buffer ETF segment will boost all providers. The entry will aid institutional investors and advisors in learning about the products. While the implementation is relatively simple, the use of options in an ETF structure requires education. The more the education the better.
IVVM and IVVB have net expense ratios of 0.50%, making them less expensive than products offered by their peers like the AllianzIM US Large Cap Buffer10 July ETF (JULT ) and the Innovator US Equity Power Buffer ETF July (PJUL ). We could see further pricing action.
However, we think a longer-term track record and a focus primarily on buffer products should help established providers retain and grow their base. We think there is room for many firms to gather assets with buffer ETFs.
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