As the ETF landscape has continued to develop and mature, the number of options investors can consider has grown significantly. One area of recent development has been defined outcome ETFs, with Allianz Investment Management LLC a key leader in the space. AllianzIM Head ETF Market Strategist Johan Grahn recently shared details regarding the firm’s defined outcome suite and how investors might use those funds in their portfolios.
AllianzIM, which recently surpassed $3 billion in ETF AUM, currently offers a variety of “buffer” ETFs in that defined outcome category. For example, the firm launched the AllianzIM U.S. Large Cap Buffer20 Jan ETF (JANW ) in December 2020. JANW charges a 74 basis point (bps) fee for its active approach. The fund aims to buffer losses in exchange for capping gains via options. JANW arrived as part of a suite of 12-month buffer ETFs, with the firm also adding six-month period buffer ETFs.
Defined Outcome ETFs on the Rise
Most recently, the shop has also added “uncapped” ETFs. Per Grahn, the firm is the only one with that type of strategy available.
“If you’re familiar with the capped products … effectively in those products, you’re paying for the buffer by selling away the upside beyond the cap,” Grahn said. “We’re reversed that, and we say we’re going to sell away the first few percentage points of returns to pay for the buffer and then you will get all the returns beyond the price difference there.”
“Then everything else is basically the same,” he added, noting that that approach helps construct a 15% buffer. He said that the strategy appeals specifically for longer time frames.
“If you’re investing over a longer time period, which most investors do, an uncapped product that is structured this way has a higher capacity to generate greater long-term returns than a capped ownership,” Grahn explained.
Defined outcome ETFs like the buffer ETFs may appeal primarily to those nearing retirement, he said. Those investors cannot afford the same drop-offs that long term equities investing can sometimes incur.
“What the defined outcome space is allowing advisors to do is to think no longer just about stocks, bonds, and cash and everything in between,” Grahn added. “They now can start to think about structured access to the equity risk premia.”
“So in plain English, instead of buying bonds, you buy structured equities, you buy buffer ETFs, so you get an immediate, and this is key, immediate protection on the downside, with long-term opportunity to make higher returns than you would if you went to fixed income,” he noted.
Looking Ahead
The firm’s idea behind offering 12- and six-month buffer ETFs is to allow investors more flexibility regarding time horizons. Tactical investors may prefer shorter time frames, while a shorter time frame can allow investors to more freely move assets to capture big market upside via other moves. With resetting options contracts inside those ETFs, Grahn added, those contract moves don’t incur tax issues for investors.
By combining six-month buffer ETFs, he noted, investors can craft a portfolio with segments resetting every month. One-sixth of a portfolio resetting every month can offer even more flexibility while benefiting from that buffer. The firm has filed for a single ETF that would offer that rolling strategy by using the six-month ETFs.
Defined outcome ETFs could have an increasing role to play in the months ahead. With U.S. equities expensive, some investors may be looking to be more conservative, Grahn noted. Tight fixed income spreads and costly equities are two factors that may account for why money is flowing into defined outcome buffer ETFs from both fixed income and equities, he concluded.
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