Are Defined Outcome ETFs For You?

Are Defined Outcome ETFs For You?

Or are there better ways to protect against market declines?

Reviewed by: Allan Roth
Edited by: Allan Roth

The stock market is risky; a plunge can come at any time. And fixed income has very low nominal yields today. So I examined whether defined outcome ETFs could be the answer.

There is now more than $9.6 billion invested in 134 defined outcome ETFs. Defined outcome ETFs offer investors exposure to the price return of broad equity markets to a cap, with built-in downside buffer levels, over an outcome period of approximately one year, at which point each ETF will reset.

I decided to take a deeper dive into an Allianz ETF. The email I received from them stated “Risk management is in our DNA.” Indeed, The Allianz Group, the parent company, “is a global financial services provider with services predominantly in the insurance and asset management business.”

How They Work

Here is how one ETF works—the  AllianzIM U.S. Large Cap Buffer10 Oct ETF (AZAO). The firm describes the ETF as follows:

"The AllianzIM U.S. Large Cap Buffer10 Oct ETF (the Fund) seeks to match the returns of the S&P 500 Price Return Index up to a stated upside Cap, while providing a Buffer against the first 10% of the S&P 500 Price Return Index losses for the currently effective Outcome Period from October 1, 2021 to September 30, 2022."

This ETF was just reset to the following terms over the next year:

Cap: 12.75%/12.01%
Buffer: 10.00%/9.26%

This means the maximum gross return over the full year will be 12.75% and, after the 0.74% annual expense ratio, that translates to 12.01%. AllianzIM will absorb the first 10% of the loss which translates to 9.26% after that same expense ratio.

I interviewed Johan Grahn, vice president and head of ETF Strategy for AllianzIM. He confirmed it tracks “the SPX, which is the S&P 500 price index return.” He stated that starting on Oct. 1, 2021, it reset with a full 10% buffer. He said, “The intent is not to capture the entire S&P 500; rather, it’s a risk mitigating strategy.”

Methodology Wrinkle

But will it capture the first 12.75% gain of the S&P 500 and absorb the first 10% of the loss over that year? The answer is no, for three reasons.

First, I already noted the 0.74% expense ratio takes away from both the upside return and downside protection.

Second, much like many annuity products, the term “price return” is a fancy way of saying they strip out the dividend return. According to, over the past 50 years ending Sept. 30, 2021, the S&P 500 price index grew by 7.904%, while the total return, with dividends reinvested, grew by 10.977%. With 50 years of compounding, the total return grew 4.14x that of the price index.

Grahn stated they would have had to adjust the cap and the buffer if they had used a total return. I suspect it wouldn’t have sold quite as well, as I’ve found most people don’t know the price return strips out dividends. Today the dividend yield is far less than historic averages at 1.28%, so differences may be less going forward than they would have been in the past.

Third, the average bid/ask spread is 0.25% if held for one year. Add up all three and this takes 2.27% from the upside and reduces the buffer by the same amount. Comparing to the total return of the S&P 500, if the gain was 12.75%, you’d get 10.48%. And if the loss was 10%, you’d only lose 2.27%.

No Free Lunches

I asked Elisabeth Kashner, VP, director of Global Fund Analytics at FactSet Research Systems, her thoughts on AZAO. She stated, “To me, the key question for investors considering the buffered ETFs is whether the protection is worth the price, with S&P 500 ETFs SPY/IVV/VOO as the obvious alternatives. The protection is far from cheap, with a 2.27% cost versus 0.03% for VOO.”

Grahn reiterated that AZAO wasn’t designed to give the total return of the S&P 500, stating, “This isn’t a free lunch.” 

So I decided to do my own calculations of a more direct risk mitigation strategy. I calculated the return of the AZAO ETF to a portfolio comprising 50% of the Vanguard S&P 500 ETF (VOO) and 50% in a one-year CD paying only 0.60% (Ally Bank). VOO has a 0.03% annual expense ratio and a 0.00% bid/ask spread. Below are the numbers.

There are a few things to note. First of all, AZAO provides less upside when markets have large gains but also a larger loss in bear markets. Yet AZAO also produces a larger loss when total return of the S&P 500 is flat. In moderate up markets or down markets, AZAO produces a better return, though it’s pretty modest.


My conclusion is, while this and other buffered ETFs provide some risk mitigation, the higher expense ratio and bid/ask spreads make it a less attractive way to hedge risk, and give up too much of the upside. In a Great Depression-type of scenario where stocks decline nearly 90%, I calculate AZAO would lose about 82%, while the 50/50 strategy would only lose 44.72%.

Of course there are many other defined outcome ETFs, but the math on those I’ve looked at yields similar results. This includes those with 20% buffers. Unless another defined outcome ETF produces a better scenario than AZAO, I won’t be buying or recommending these ETFs to clients or readers, as I’m not buying any myself.

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.

Allan Roth is founder of Wealth Logic, an hourly based financial planning and investment advisory firm. He also benchmarks portfolio performance for foundations and other business concerns. Roth's website is You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter