Blue Haven

Using buffered ETFs for built in returns

By April 16, 2024 No Comments

Today, we’re highlighting a number of ETFs that offer built in returns under certain market scenarios. These ETFs can be an ideal investment for clients who want to limit potential downside risk. In exchange, investors also give up some of their upside. We’ll fit these ETFs into three different categories:

  • Conservative: lots of protection but small upside
  • Moderate: some protection and some upside
  • Aggressive: little protection and more upside

How we get the returns

First, the ETFs we are highlighting are known as “buffered ETFs.” We’ve written about these ETFs before, and suggest reviewing this link for a quick educational primer. We have vetted these products and seen that they do what they’re supposed do. They acted as expected during the Covid crash of 2020 and the bear market of 2022. They are somewhat complex, but we use them with confidence.

The buffered ETFs we are focused on will be impacted by the performance of the SPY or QQQ. These are two popular index funds that track the the S&P 500 (SPY) and the NASDAQ 100 (QQQ). So when you see “the SPY” just think “S&P 500.” You can’t invest in indexes directly, which is why people invest in index funds like SPY instead.

Below are real examples that conservative investors may find attractive. The ticker in the left hand side represents the ETF ticker you would buy. The “asset +/-” row at the top signifies how the performance of the SPY impacts said ticker. All of these tickers “reset” at the end of the year, meaning the performance represents the next 8 months worth of performance. We buy them with the intent of selling on or before their next reset date.

For example, ticker JAND will return 5.35% over the next 8 months even if the SPY falls 15%. Notice though, if the SPY goes up 15%, JAND will only return 5.35%. JANH will post a positive return of 4.64% even if the SPY falls 20%.

More aggressive examples

For investors who wish to use the buffered ETFs in a more aggressive manner, there are a number of potential ETF tickers to consider. The ticker XTJA, for instance, will return 10% between now and the end of the year even if the SPY posts a flat return.

However, XTJA offers only little protection against downside. But the idea of earning 10% in a flat market may be appeal to some investors. You’ll notice that QTJA offers an even greater upside scenario, returning 13.57% if the QQQ (Nasdaq 100) rises just 5% between now and the end of the year. But that greater upside is a result of the QQQ being more volatile than the SPY.

For those who want something more moderate, consider BNOV. This ETF is tied to the SPY, and will protect against the first 5% of losses in the SPY. In addition, if SPY is flat, BNOV will still return 6%. BNOV’s return profile is through October 31st. Some may value the shorter outcome period compared to the others.

Use cases for these types of ETFs

The most common way we are using these ETFs is for more conservative investors who want to do something with their cash but don’t want to have outright market exposure. Many investors have 1 or 2 year CDs or Treasury bills that they purchased in 2022-2023 that are now maturing. Additionally, some of the conservative buffered ETFs highlighted above may serve as a fixed-income like allocation.

If you have questions about these types of ETFs and how they might fit in your portfolio, be sure to reach out to us!

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