**Seeking Shelter from Market Turbulence? Buffer ETFs May Offer a Solution**
In the midst of market volatility, investors are increasingly turning to buffer exchange-traded funds (ETFs) as a way to mitigate potential losses. These innovative funds, also known as defined-outcome ETFs, utilize options contracts to provide a predetermined range of outcomes over a set period, typically tied to an underlying index such as the S&P 500.
With over 327 buffer ETFs currently available, representing more than $54.8 billion in assets, it’s clear that demand is on the rise. According to Bryan Armour, director of passive strategies research for North America at Morningstar, these funds have been one of the fastest-growing areas of the ETF market over the past five years.
So, how do buffer ETFs work? They have an “outcome period,” typically one year, during which investors are protected from a certain percentage of losses and capped returns above a certain threshold. For instance, a buffer ETF might shield investors from the first 10% of losses while limiting upside returns to 15%. However, investors must be aware that buying or selling during the outcome period may impact the effectiveness of the buffer.
While buffer ETFs offer some downside protection, they also come with trade-offs. Investors typically don’t receive dividends, which can contribute significantly to returns over time. Additionally, buffer ETFs have higher fees than traditional ETFs, averaging 0.8% compared to 0.51%. Perhaps the biggest drawback is the opportunity cost, depending on alternative investment options.
Despite these limitations, buffer ETFs can be an attractive option for conservative investors seeking to balance risk and potential returns. Certified financial planner David Haas, president of Cereus Financial Advisors, has been using buffer ETFs in client portfolios and appreciates their ability to offer immediate liquidity if needed.
Ultimately, buffer ETFs may be suitable for investors with low risk tolerance and shorter time horizons, as long as they fully understand how these funds work. As Armour notes, it’s essential to weigh the pros and cons before investing in buffer ETFs.
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