‘Boomer Candy’ Buffer ETFs Get Sweeter

ETF issuers continue to find new ways to package buffer strategies because they know financial advisors and their clients can’t get enough of the idea of downside protection, even if it comes at the cost of an upside performance cap.

Described by some analysts as “boomer candy” because of the growing appeal among investors in or near retirement, buffered ETFs have become the latest darlings of financial advisors who are presenting them to nervous clients like cozy blankets on a cold night.

By the latest count, according to etf.com data, there are more than 200 buffered ETFs on the market, combining for nearly $46 billion in total assets under management. That’s up from just $200 million in 2018, and up from $35 billion a year ago.

'Boomer Candy' Buffer ETFs

The initial attraction is obvious and understandable, and you can’t blame the ETF issuers for rushing into the space with all manner of creativity.

Take your typical baby boomer, who is either already retired or about to retire with whatever nest egg has been built up, and present the notion of bolting some guardrails around the portfolio for protection.

The protection typically comes in two forms. There’s the traditional buffer that might absorb the first 10% of the downside over a defined outcome period, typically 12 months. The other protection option is the floor version that allows the investor to absorb the first 10% down and protects the investor beyond that.

These buffer strategies are usually pegged to a broad market index like the S&P 500, and the downside protection is paid for with a cap on the upside.

As one of the most popular categories in the ETF space, buffer innovation has been fast and furious to include 100% downside protection, which begs the question of whether an investor requiring such a guarantee should even be exposed to equities.

Keep in mind, the average buffered ETF has an expense ratio of 78 basis points, which is about 75 basis points more than the cost of just owning the underlying index.

Allianz Investment Management, one of bigger players in the space with more than $3.6 billion in buffer ETF assets, has rolled out a suite of funds of buffer ETFs, which essentially replaces the defined outcome component with a perpetual set of guardrails.

Then, there’s the ultimate twist on buffering from Calamos Investments, which is expanding its push into the space by offering 100% downside protection on the price of bitcoin in exchange for an upside performance cap in the 10% range.

Again, it begs a question related to suitability.

While it might seem exciting to invest in bitcoin without risk, the reality is you’re paying a lot of fees to maybe capture 10% upside of an asset that has gained more than 100% over the past 12 months.