Podcast: Understanding Buffer ETFs - 19 juin 2024
Looking for a shock absorber for your portfolio? In this deep-dive episode, Portfolio Manager Chris McHaney, and your host, McKenzie Box, share how Buffer ETFs can mitigate losses — helping you stay invested during market uncertainty. They’ll explain how these strategies work, what to consider, and where they fit into a portfolio.
McKenzie Box is Vice President of Product Management and Strategy at BMO Global Asset Management. She is joined on the podcast by Chris McHaney, a Portfolio Manager and ETF Specialist at BMO Global Asset Management. The episode was recorded live on Wednesday, June 19, 2024.
What are Buffer ETFs?
Buffer ETFs are a relatively new category of ETFs that are gaining in popularity, particularly in the U.S. over the recent years. It is a defensive equity strategy and could be considered a part of what BMO Global Asset Management refers to as this new trend of convergence investing. Buffers have typically been offered in a structured note format issued by capital market desks. Increasingly we are now seeing asset managers offering similar strategies to retail investors and Advisors through ETFs. The strategy involves exposure to an underling asset class, like the S&P 500, and providing some element of down side protection over a target outcome period, like three months for example. The trade off for this protection is having the upside potential capped in order to pay for that buffer. The downside protection can be around 15% and the upside cap can be around a 10% level, while also earning dividends on top of that.
- BMO US Equity Buffer Hedged to CAD ETF – July – (Ticker: ZJUL) *COMING SOON*
- BMO US Equity Buffer Hedged to CAD ETF – April (Ticker: ZAPR)
- BMO US Equity Buffer Hedged to CAD ETF – January (Ticker: ZJAN)
- BMO US Equity Buffer Hedged to CAD ETF – October (Ticker: ZOCT)
Why Buffer ETFs Now?
Considering where we are in the economic cycle right now, investors may want equity exposure but may not want to take full equity risk. This could be someone in or near retirement or a more risk averse investor. This strategy can help damped their overall volatility and reduce the daily ups and downs. Other reasons can be the increasing concentration of the magnificent seven in the S&P 500, as well as there tends to be increased volatility during election years, particular in and around the election itself.
Portfolio Positioning
There are a lot of moving parts in these ETF and how they are priced. But generally, the buffer ETF will move in the same direction as the underlying market, but at a lower magnitude. What is offered in the beginning of the outcome period is about 15% downside protection and about a 10% cap to the upside. As you move throughout the outcome period, there is a new risk return trade off to consider. The cap and protection level will change intra period. As an added level of transparency, investors may want to look at our website before they invest in one of these ETFs which displays the current level of protection and cap, to decide what is suitable for them.
BMO Buffer ETFs seeks to provide income and appreciation that match the return of a Reference Index up to a cap (before fees, expenses and taxes), while providing a buffer against the first 15% (before fees, expenses and taxes) of a decrease in the Reference Index over a period of approximately one year, starting from the first business day of the stated outcome period.
BMO Buffer ETFs seeks to provide income and appreciation that match the return of a Reference Index up to a cap (before fees, expenses and taxes), while providing a buffer against the first 15% (before fees, expenses and taxes) of a decrease in the Reference Index over a period of approximately one year, starting from the first business day of the stated outcome period.
Magnificent Seven Stocks: Alphabet (GOOGL), Apple, Amazon, Meta, Microsoft, Nvidia and Tesla.
The Magnificent Seven account for about 33% of the market cap of the S&P 500, according to Bloomberg, as of Wed, June 19, 2024.
The S&P 500 index is up 15% year to date, as of Wednesday, June 19, 2024.
Buffer ETFs in the U.S. have seen inflows of around $20 billion over the last two years, according to Nasdaq.
There is about US$68 billion invested in buffer ETFs in the United States, with about $8 billion in inflows in 2024 so far, according to Bloomberg, as of Wed, June 19, 2024.
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An investor that purchases Units of a Structured Outcome ETF other than at starting NAV on the first day of a Target Outcome Period and/or sells Units of a Structured Outcome ETF prior to the end of a Target Outcome Period may experience results that are very different from the target outcomes sought by the Structured Outcome ETF for that Target Outcome Period. Both the cap and, where applicable, the buffer are fixed levels that are calculated in relation to the market price of the applicable Reference ETF and a Structured Outcome ETF’s NAV (as Structured herein) at the start of each Target Outcome Period. As the market price of the applicable Reference ETF and the Structured Outcome ETF’s NAV will change over the Target Outcome Period, an investor acquiring Units of a Structured Outcome ETF after the start of a Target Outcome Period will likely have a different return potential than an investor who purchased Units of a Structured Outcome ETF at the start of the Target Outcome Period. This is because while the cap and, as applicable, the buffer for the Target Outcome Period are fixed levels that remain constant throughout the Target Outcome Period, an investor purchasing Units of a Structured Outcome ETF at market value during the Target Outcome Period likely purchase Units of a Structured Outcome ETF at a market price that is different from the Structured Outcome ETF’s NAV at the start of the Target Outcome Period (i.e., the NAV that the cap and, as applicable, the buffer reference). In addition, the market price of the applicable Reference ETF is likely to be different from the price of that Reference ETF at the start of the Target Outcome Period. To achieve the intended target outcomes sought by a Structured Outcome ETF for a Target Outcome Period, an investor must hold Units of the Structured Outcome ETF for that entire Target Outcome Period.
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