The difficulty in using buffer funds, though, is timing. If investors get in as stocks start tumbling, then they’ll benefit from smaller losses. Take the Innovator S&P 500 Ultra Buffer ETF - September (PSEP), which seeks to buffer against the first 15% of losses in SPY in each annual period starting in September.
For the year starting last September, SPY fell a little over 12%, while PSEP only dropped 0.8%.
But if investors get in just as markets are about to rebound, then they could lose out on major gains. For the year starting September 2020, when stocks enjoyed a bull run off the pandemic bottom, SPY rose about 29%, while PSEP gained nearly 11%.
Investors also must stay invested for the entire time span that the fund targets, typically a year, to experience the protection the fund aims for, said Amrita Nandakumar, president of Vident Investment Advisory. In addition, buffer ETFs don’t pay out dividends to investors as an equity fund would, she said.
Innovator’s Day, however, sees continued interest in using buffer funds to smooth out wild swings.
“We would argue that these help advisors mitigate market timing risk because the alternative is you are just pulling your money out” when the market grows volatile, Day said. “We’re helping advisors keep their clients invested and protected, as opposed to them just pulling out and putting the money under the mattress and then missing out.”
--With assistance from Sam Potter.
This article was provided by Bloomberg News.