- Buffered ETFs are the most popular type of ETF right now.
- They offer investors downside protection, limiting their losses.
- First Trust is the leader in buffered ETFs.
If you don’t know about buffered ETFs, here is why they are so popular right now.
Global ETF assets continue to surge higher, rising 28% in 2024 to $14.7 trillion. This year, demand has only increased, as investors seek out the diversification and active management that ETFs provide in choppy and uncertain markets.
Overall, ETF assets grew $43.2 billion in February, despite the headwinds of declining markets. Total assets now stand at about $14.78 trillion, according to Lipper.
Through February, according to Lipper, ETFs saw $321.9 billion in inflows, with $164.8 billion of that coming in February. Of that February haul, $101.3 billion went into equity ETFs, while $51.4 billion flowed into bond ETFs, $8.2 billion went into commodities funds, $2.8 billion went into money market ETFs, while $2.2 billion flowed into mixed-assets ETFs. Alternatives ETFs saw $1.2 billion in outflows.
The types of ETFs that appear to be in the highest demand are defined outcome or buffered ETFs, according to a recent report by Brown Brothers Harriman (BBH). The annual BBH survey of institutional investors found that 29% of global institutional investors expect to invest in buffered ETFs over the next 12 months, which is the most of any equity category. By comparison, 22% said dividend ETFs and only 18% said sector or thematic equity ETFs.
“A lot of investors believe that US equity markets are overvalued and are looking to manage risk accordingly through buffered ETFs,” Andrea Murray, vice president of exchange-traded fund services and investor services at BBH, said.
What Are Buffered ETFs?
Buffered ETFs have quietly become one of the fastest-growing segments of the ETF universe. Since 2018, some 250 buffered ETFs have launched, and they have amassed approximately $47 billion in assets under management.
The reason why they are so popular in this current environment is because they are structured to provide investors with downside protection. limiting losses when the market goes south. However, they also typically cap upside returns.
For example, a 10% buffered ETF means that the first 10% of a loss is protected by the buffer. So, if the market is down 20%, the ETF would only be down 10%. If the market was down 10%, the ETF would be flat, adding in that 10% buffer.
On the other hand, the returns are also capped. So, if it’s a 20% capped buffered ETF, the ETF could grow no more than 20% over a certain period. If the market gained 30%, this ETF could only go as high as a 20% gain.
There are restrictions, such as the investor must hold the ETF for a certain period of time, typically at least a year, to take advantage of the buffers. Also, there are different buffered percentages based on the individual ETF.
The growth and demand for buffered ETFs shows that investors are much more interested in protecting themselves from deep losses than they are in the potential for blowout returns. That is magnified in this particular market.
First Trust Is a Leader in Buffered ETFs
One of the leading providers of buffered ETFs is First Trust. The FT Vest Laddered Deep Buffer ETF (NYSE:) is the most popular buffered ETF with $1.23 billion in assets. But First Trust has a whole series of buffered ETFs with different buffers that run for various time periods. First Trust also just launched several new buffered funds, with a range of percentages attached to them, including 10%, 15%, 25%, and 100% buffers.
Innovator ETFs is another leader in the buffered ETF space, with a vast lineup of buffered ETFs, including 100% buffered offering. The major houses, including iShares and Fidelity, offer them as well.
The benefits of buffered ETFs is not in the market-beating returns, but in protecting your assets and limiting losses from a precipitous drop in the market.