Latest news with #CharlesChampagne
Yahoo
01-08-2025
- Business
- Yahoo
Buffered ETFs gain steam in valuation-wary markets
As a new round of U.S. tariffs send markets tumbling, could a once-overlooked ETF hedge offer investors the safety net they're seeking? Buffered ETFs, also known as defined outcome products, have gained traction in recent years by offering partial downside protection in exchange for capped gains. Each fund is structured to shield investors from a set percentage of losses, typically 10% to 20%, over a fixed period. In return, gains are limited, and the terms reset at the end of each outcome window. Buffered ETFs struggled to gain traction after their late 2018 debut — and for good reason. From 2019 through 2021, the S&P 500 returned an average of 24% annually, leaving little appeal for products that cap upside. But a sharp downturn in 2022 changed the equation. With the index falling nearly 20% that year, investors poured nearly $10 billion into buffered ETFs, breathing new life into the once-overlooked product. READ MORE:Top 10 dividend stocks of the past yearThe case for investing in emerging markets, despite underperformanceThe 'granular' investing strategy with big tax savings for HNW clientsWall Street builds S&P 500 'no dividend' fund in new tax dodge During times of declining equities, investors often rely more heavily on bonds. But in recent years that strategy hasn't always worked out, according to Charles Champagne, head of ETF strategy at Allianz Investment Management. "When you have an equity and fixed income portfolio, if equities are in a tougher market, you expect your fixed income to offset those losses, and that just really hasn't happened in the past [couple of years]," Champagne said. "So these products really help in that capacity." To build buffered ETFs, issuers like Allianz use options to shape both downside protection and upside limits. They start by buying a deep-in-the-money call to mirror market exposure. Then, to create the buffer, they buy an at-the-money put and sell an out-of-the-money put, defining how much loss the fund will absorb. To offset the cost of this protection, they sell a call option, which in turn sets the cap on gains. This options mix allows issuers to offer defined outcomes over a set time frame, typically one year. While buffered ETFs offer downside protection, their complex structure and active management often result in higher fees. First Trust and Innovator dominate the market, with flagship products like BUFD and PJAN charging expense ratios of 0.95% and 0.79%, respectively. Smaller issuers such as Allianz offer slightly lower costs — its most popular fund, JANW, carries a 0.74% fee — but costs remain high compared to the rest of the ETF market. Champagne said he expects those ratios to decline as the funds grow, but that will take time. "There is a cost to us managing these portfolios that we have to apply to the expense ratio. And then, like anything, economies of scale will eventually start to kick in," Champagne said. "And as assets continue to drive towards defined outcome ETFs, that will inevitably draw down that total cost to the investor through the expense ratio. But anytime you're dealing in options or exotic investments, there are additional costs that are factored into the total cost of the ETF." High costs aren't the only deterrent for some advisors when considering buffered ETFs. Carson McLean, the founder of Altruist Wealth Management in Charlotte, North Carolina, said that buffered ETFs often "overpromise and underdeliver" when it comes to real-world investing behavior. "They introduce complexity, hidden trade-offs (like forgone dividends and capped returns), and a timing dependency that most investors don't fully grasp," McLean said. "In my view, it's risk repackaging more than risk reduction." Advisors like Kyle Ray, the founder of Ridgeback Wealth Management in Peachtree City, Georgia, share a similar view of buffered ETFs. "I am not a fan of buffered ETFs for several reasons," Ray said. "They can be complex, costly and tax-inefficient due to short-term capital gains resulting from frequent options trading. Additionally, they carry liquidity risks and other drawbacks." More than one way to hedge For clients looking for downside protection, well-worn strategies are often still the best option, according to some advisors. McLean says a traditional bond-equity mix can still work well, especially when combined with thoughtful planning, disciplined rebalancing and guidance that keeps clients steady during market swings. With this approach, it's crucial to match the portfolio structure to the actual spending needs and time horizon of the client, he said. "That may not sound exciting, but it tends to work better than most engineered products," McLean said. Another approach involves using TIPS (Treasury inflation-protected securities) to build a laddered bond portfolio. With TIPS ladders, advisors purchase bonds that mature at regular intervals (often annually), helping to create a predictable stream of inflation-adjusted income over time. "While I do not advocate for timing market entries, now is a good time to assess whether you need high equity risk to achieve your financial goals," Ray said. "Currently, real yields on a 30-year ladder of TIPS are 2.4% above inflation. Purchasing a 30-year TIPS would be expected to more than double in real purchasing power if held to maturity. With real yields this high, investors should seriously consider whether they would get a fine result with fewer equities and less stomach acid." Investing with the right mentality Beyond the specific strategy, advisors say it's crucial to have the right mentality when it comes to long-term investing and the challenges it presents. "The bottom line answer is that no matter how you feel about market valuations, the market can either stay irrational a lot longer than you expect, or alternatively, corporate earnings can catch up with lofty valuations, bringing them back down to reality. Case in point are the earnings of companies like Meta and Microsoft," said Alex Caswell, a financial planner at Wealth Script Advisors in San Francisco. "I would encourage investors to think primarily about the risk/reward balance in their entire portfolio and commit to a long-term holding mentality," he added." Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
08-07-2025
- Business
- Yahoo
Innovator Launches 2 Dual Directional ETFs
Two new ETFs are designed to let investors benefit from up and down markets — but will they want to? Innovator ETF's two new dual directional strategies allow investors to benefit from market upturns or downturns so long as their index, the S&P 500, stays within a certain range. Like most buffered products, the funds limit upside yield and buy additional put options under the hood. The products are mainly aimed at highly risk-averse investors, like retirees or pre-retirees, who are more concerned with capital preservation than capital accumulation, according to Innovator's director of product strategy Andrew Nelson. Not all experts are convinced of the product's utility, however, because of its high upside cap. 'The payoff structure works really well when you're in those negative 10% to negative 15% ranges, and that just doesn't happen very often,' said Charles Champagne, head of ETF strategy at AllianzIM. 'So the payoff structure benefit is a little narrow.' READ ALSO: All Sunshine for First Spot Solana ETF and Dimensional Hits $200B in ETF Assets Dual directional strategies have long existed in the insurance and annuities spaces — for example, with registered indexed-linked annuities, or RILAs — but Innovator's products mark their entry into the world of ETFs, according to experts. 'There's no free lunch. It's not magic, it's not voodoo,' Nelson said. 'The cost of this is actually that your 'normal' cap, your standard cap that you know and love, is going to be lower than [that of] a competitor.' The two strategies have slightly different buffer levels and upside caps: The Innovator Equity Dual Directional 10 Buffer ETF (DDTL) has a 10% inverse cap and buffer level and a 12.59% upside cap. The Innovator Equity Dual Directional 15 Buffer ETF (DDFL) has a 15% inverse cap and buffer level and a 12.59% upside cap. Product Palooza. The dual directionality funds are the latest introduction of strategies into the ETF world, like autocallables, that have long existed in other spaces. 'As issuers try to find new areas to bring products, they look to insurance products and at the structured notes that are available,' Champagne said. 'It's not surprising that these came to market.' This post first appeared on The Daily Upside. To receive exclusive news and analysis of the rapidly evolving ETF landscape, built for advisors and capital allocators, subscribe to our free ETF Upside newsletter.
Yahoo
26-06-2025
- Business
- Yahoo
The Rise of the Buffer ETF
BlackRock is betting on the future of buffers. Buffer ETFs that limit downside risk but also have caps on upside gains, are having a moment. Assets have ballooned from $5 billion in 2019 to $181 billion last year, according to recent BlackRock and Morningstar data. It's expected to triple to $650 billion by the end of the decade. Despite the higher fees, buffer ETFs earn more than 10% per dollar invested per year over the past five years, per Morningstar. The dramatic rise in buffer ETFs' AUM reflects current market volatility and geopolitical turbulence, signaling a sea change in how financial professionals think about mitigating portfolio risk. 'These products have staying power,' said Charles Champagne, head of ETF strategy at Allianz Investment Management. 'They definitely have longevity.' READ ALSO: An ETF for the Buy Now, Pay Later Market and RFG's Bluemonte Jumps Into ETFs Defined outcome ETFs allow investors to buy stocks and sell them at their starting price even if prices fall, preventing losses, while also selling call options above current stock prices, limiting upside yields. The SEC's 2019 ETF rule streamlined fund launches and led to a boom in new buffered products, which are bought and sold at the beginning and end of a predetermined period. Down markets, like the investing environment of 2022, have also had a significant impact on buffers' popularity, since they are increasingly regarded as a stand-in for fixed-income when equity markets are down, according to Champagne. Although the buffer market is currently highly concentrated — First Trust and Innovator dominate the space — it is likely to grow 'from [both] an issuance standpoint and an asset standpoint,' he added. 'When the market's looking iffy, advisors tend to allocate more to fixed-income for that diversification effect and protection,' Champagne said. 'We've stress-tested portfolios… and what we found was, if you take about 10% away from fixed-income and 10% away from the equity allocation and move it into a buffer, it generally outperforms over a long-term horizon.' Buffer ETFs are also being launched at breakneck speed. According to the BlackRock study: In the past five years, nearly 500 buffer ETFs have been launched. Last year, 27% of all new ETF listings were buffer funds. Over the Hurdle (Rate). Much of the recent rise in popularity can also be attributed to the market swings following President Trump's 'Liberation Day' tariffs, as investors seek safe havens. Still, the period in which an investor buys a buffer can have a strong impact on its performance. AllianzIM offers a unique uncapped structure buffer ETF, with a limit of 15% on the downside but unlimited upside yields beyond a given 'hurdle rate.' 'It's a really strong structure when you have a bullish view on the market,' Champagne said. This post first appeared on The Daily Upside. To receive exclusive news and analysis of the rapidly evolving ETF landscape, built for advisors and capital allocators, subscribe to our free ETF Upside newsletter.
