Buffered ETFs offer a unique investment solution that balances protection and growth potential, making them an attractive option for certain investors. If you’re considering buffered ETFs or want to understand them better, here are seven essential things to know:

1. What is a Buffered ETF?

Buffered ETFs combine the benefits of traditional ETFs with a built-in safety net. They use options strategies to create a “buffer” that absorbs losses up to a certain percentage. For example, if an ETF has a 10% buffer, it absorbs the first 10% of losses from the underlying index. Beyond this buffer, losses are passed on to the investor.

2. How the Buffer Works

The buffer in a buffered ETF is a predefined percentage that covers potential losses. If the underlying index declines beyond this buffer, the ETF will experience additional losses. For instance, with a 10% buffer, a 12% drop in the index results in only a 2% loss for the ETF. Understanding the buffer level is crucial to assess the degree of protection.

3. Potential for Upside

Buffered ETFs provide protection against declines while offering potential for capital appreciation. However, there may be a cap on the maximum returns you can achieve. For example, the ETF might limit gains to a specific percentage, even if the underlying index performs exceptionally well.

4. Costs and Fees

Buffered ETFs often come with additional costs compared to traditional ETFs. These may include management fees and the costs associated with the options strategies used to create the buffer. Reviewing the expense ratio and other fees is important to understand their impact on your overall returns.

5. Duration of Protection

The buffer provided by a buffered ETF typically lasts for a fixed period, such as one year. After this period, the ETF may reset its buffer levels. Knowing the duration helps in aligning the investment with your financial goals and planning accordingly.

6. Risk Considerations

Buffered ETFs are not risk-free. While they offer a buffer against market declines, significant drops beyond the buffer will still result in losses. Additionally, a cap on potential gains means that in a rapidly rising market, the ETF might not perform as well as an unbuffered index ETF.

7. Suitability for Risk-Averse Investors

Buffered ETFs can be particularly suitable for investors who are nearing retirement or those who are risk-averse. If you’re approaching retirement age, managing risk becomes crucial. Buffered ETFs offer a way to protect your portfolio from significant losses while still providing some growth potential. They can help safeguard your investments against market volatility, making them a viable option for those looking to preserve their capital as they transition into retirement.

Is Your Portfolio Aligned with Your Risk Tolerance?

If you’re concerned about taking on more risk than you should, especially as you approach retirement, it’s important to review your current portfolio. Buffered ETFs might be a suitable solution for adding a layer of protection to your investments.

Contact us today to schedule a comprehensive review of your portfolio. Our financial expert can help assess your current investment strategy, determine if you’re taking on more risk than necessary, and explore how buffered ETFs might fit into your retirement planning. Let us assist you in achieving a balanced and secure financial future.

Contact Us for a Portfolio Review