Johan Grahn, Head ETF Market Strategist at Allianz Investment Management, LLC, joined Keith Black, Managing Director of RIA Channel, to discuss the benefits of including buffered ETFs in client portfolios.
Buffered ETFs can be helpful for clients who are sensitive to market volatility and are looking for predefined returns. These ETFs provide more predictable investment outcomes through downside protection and an ability to earn capped upside returns.
For example, ETFs with a 10% buffer are designed to have no downside risk when markets decline by 10% or less during a one-year defined outcome period, while a 20% buffer protects investors against the first 20% of market decline. Investors can also participate in a limited portion of the positive returns of the stock market.
Grahn notices that advisors and their clients use buffered ETFs in several ways. First, as clients are looking to derisk their equity portfolio, they sell their equities and reinvest in buffered ETFs instead of cash or fixed income. Second, since buffered ETFs are designed to have low volatility and low correlation compared to equity markets, some investors treat them as alternative investments. Finally, investors who may have been too conservative or have had cash on the sidelines for too long can purchase buffered ETFs to get back into the market and increase their exposure to equities.
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