BlackRock Sees Upside to Downside Protection

ETF issuers are responding to nervous investors with 100% downside protection strategies.

Major ETF issuers are addressing increased demand for funds that provide investors with 100% downside protection with BlackRock Inc. the latest entrant into the space on Monday. 

The world’s largest asset manager debuted an iShares Large Cap Max Buffer Jun ETF (MAXJ), which offers 100% downside protection for investors holding the ETF for the full 12-month cycle in exchange for a 10.6% cap on upside performance.

“More than six million people retire every year in the U.S., and they’re looking for new ways to protect their wealth in retirement,” said Rachel Aguirre, head of U.S. iShares product at New York-based BlackRock.

A new iShares suite will launch a new version of the S&P 500 Index tracking ETF every quarter to tap into a market hungry for something that hedges stock market risks and/or offers an alternative to fixed income.

Various forms of buffered ETF strategies that offer some level of downside protection in exchange for an upside cap are not new to the ETF space. But 100% downside protection has been gaining appeal in stride with rising risks in the bond and stock markets, and as these funds provide better returns. 

According to Aguirre, ETFs offering levels of buffered protection have grown to over $100 billion, up from $5 billion just five years ago.

“We see a couple of possible use cases,” she said. “They can be used to replace a portion of a core equity allocation to reduce overall risk, or actually replace some fixed income.”

Aguirre references the 10.6% performance cap as being more than double the yield on the 10-year Treasury bond as a selling point to income-seeking investors. But the Treasury yield is virtually guaranteed, while the MAXJ return requires the S&P 500 to gain at least 10.6% over the next 12 months.

Calamos Sees Potential in Downside Protection

Matt Kaufman, head of ETFs at Calamos Investments in Naperville, Ill., also sees pure potential ahead for ETFs offering 100% downside protection.

Calamos introduced its first such ETF in a series in May and has already increased the start schedule after having brought in nearly $200 million in ETFs in May and June.

The Calamos S&P 500 Structured Alt Protection ETF-May (CPSM) was originally designed to debut quarterly, similar to BlackRock’s MAXJ, with Nasdaq and Russell 2000 ETF versions filling in on similar quarterly schedules. But Kaufman said investor demand drove the decision to increase the S&P 500 version to monthly.

“This is the beginning of a pretty large move in the capital protection space,” he said.

At 50 basis points, BlackRock is coming in as the lowest-cost ETF offering 100% protection. But lower fees will be stacking up against increasing creativity as was illustrated by Wheaton, Ill.-based Innovator Capital Management, which has rolled out an ETF offering 100% protection that only needs to be held for six months.

Innovator, which essentially created the 100% downside protection category, on Monday unveiled the Innovator Equity Defined Protection ETF – 6 months Jan/Jul (JAJL), which caps performance at 5%.