Coming into the year, we highlighted our interests in buffered ETFs, like BJAN. Our base case was that the market was coming off an exceptional 2019, and was not likely to repeat those gains in 2020. One reason: we felt like Apple’s stock was posing risks to the broader market as a whole. Well, after Apple fell 20% in a week and the S&P 500 declined 15%, we certainly feel like we made the right call. By investing in buffered ETFs like BJAN at the beginning of the year, we’ve managed to experience less volatility in portfolios than the broader market would have allowed.
Buffered ETFs performance
The S&P 500 is currently down 8.56% year-to-date. For comparison, BJAN is down 6.84% (and another buffered ETF, PJAN is only down 4.88%):
Importantly, BJAN offers a buffer against the first 9% in year-to-date losses in the S&P 500. Therefore, if the index finishes the year between -9%-0%, BJAN will ultimately rise by 7.2%, erasing its current 6.84% loss. This is true regardless of if the S&P 500 were to finish down 9% for the year or down 5% for the year. Any decline inside the buffer zone (-9%-0%) will see BJAN finish the year close to its starting price of $29.06 (last trading @ $27.11).
Opposite the buffer is BJAN’s cap, which is 13.30%. This means that BJAN will participate in the first 13.30% worth of year-to-date gains in the S&P 500. For the S&P 500 to finish up 13.30%, it would need to close at 3,659, or 24% higher than Friday’s closing price. The following graphic can help you visualize the different BJAN scenarios:
Why BJAN makes even more sense now
BJAN has already helped some of our portfolios experience less volatility than the broader market. But we’ve been allocating even more money to it now that the buffered ETF is down 6.84% on the year. And here’s why:
- If the S&P 500 doesn’t go anywhere for the rest of the year, we can lock in a 7.2% gain by owning BJAN
- If the S&P 500 finishes the year 5% lower from here, it would be down 13.50% for the year. BJAN would end up with a year-to-date loss of 4.50% in that scenario (9% buffer – 13.50% SPX decline = 4.50% BJAN decline).
- If BJAN were to finish the year down 4.50%, we’d still be locking in a 2.70% return. That’s more than double the current yield on the 10-year Treasury bond.
Other Consideration to owning BJAN
- Buying BJAN when it is down 6.84% for the year means your effective buffer is 15.84%. This is because the S&P 500 isn’t yet down 9% for the year, so BJAN’s true fair value right now is -0%. But we can buy it at a 6.84% discount right now (thus 6.84% discount + 9% buffer = 15.84% effective buffer).
- So in effect, we have an additional 7% worth of downside protection (effective buffer of 15.84% – current 8.56% S&P 500 year-to-date loss = 7.28% of additional downside protection).
- If the S&P 500 were to fall an additional 12% from here and finish the year down 20% total, we would only lose 4.16% by owning BJAN (20% S&P 500 loss – 15.84% effective buffer = 4.16% BJAN loss).
- BJAN’s effective cap is now 20.50% (7.2% rally to fair value + original 13.30% cap = 20.50% effective cap).
- If the S&P 500 rises 10% from here, it will finish the year at 3,249 for a year-to-date gain of 0.60%. BJAN will have risen 7.80% in that scenario.
Improved risk-adjusted returns
As outlined above, BJAN is currently offering an extremely favorable risk-adjusted opportunity right now. We can lock in future positive returns today, without needing the market to do anything. And if the market does keep falling, we have 7% worth of downside protection from here. In exchange for that, we’re giving up less than 3% of the potential upside if the S&P 500 were to rise 10% between now and the end of the year. Said another way, our floor (risk) is twice as high as our ceiling (reward) is low.
Buffered ETFs are perfect for this market
With investor anxiety high, buffered ETFs offer a great way to protect against market losses. They’re helping us keep our clients invested, albeit with lower risk than owning the broader market. Furthermore, because many of these buffered ETFs are currently down year-to-date, they also offer particularly attractive entry points. So yes, not only did we buy buffered ETFs like BJAN at the beginning of the year. But we’re also increasing our allocation to them now.
Other buffered ETFs that we like as buy and hold investments are KJAN, EJAN, IJAN, FFEB, NJAN, DFEB, and PJAN. If you do buy one of these or any other buffered ETF, make sure you understand where the ETF is currently priced in relation to the index it’s tied to. Feel free to contact us if you’d like to learn more about how buffered ETFs can help improve your returns in a volatile market this year.
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