Back in 2018, exchange-traded fund manager Innovator put form to what many consider the first “defined outcome” ETFs, also known as buffered ETFs.
As the name implies, these investment products are designed to offer you limited exposure to certain asset classes with a strategic ” buffer” to add a measure of protection against big losses.
It sounds like the best of both worlds, with the ability to participate in the upside of an investment while limiting your downside risk. The truth is that even buffered ETFs are not risk-free — and, of course, by taking a limited stake in these assets, you don’t get the same amount of profit potential as you would if you just dove right in directly.
Still, if you’re interested in buffered ETFs, here are five of the most popular and liquid options:
— Innovator S&P 500 Power Buffer ETF, February Series (ticker: BFEB)
— Innovator Nasdaq-100 Power Buffer ETF, January Series (NJAN)
— FT Cboe Vest U.S. Equity Deep Buffer ETF, January Series (DJAN)
— Innovator Laddered Fund of S&P 500 Power Buffer ETFs (BUFF)
— Innovator Triple Stacker ETF, January Series (TSJA)
Innovator S&P 500 Power Buffer ETF – February Series (BFEB)
As mentioned previously, Innovator is widely seen as the first out of the gate when it comes to buffered ETFs.
BFEB is one of a family of time-limited funds that offers investors protection against the first 15% of losses over the 12-month outcome period. As you can guess by the name of this February series fund, investors are protected from the start of February 2021 to the start of February 2022. That makes the time perfect to buy this buffered ETF, if the strategy interests you.
Assets under management are comparatively low at present, though it’s likely assets will continue to accumulate as investors take a position in this most recent vintage. If you’re looking for a short-term protection plan, you can find 11 other monthly flavors of these buffered ETFs from Innovator, too. The fund comes with an annual expense ratio of 0.79%, or $79 for every $10,000 invested.
Innovator Nasdaq-100 Power Buffer ETF – January Series (NJAN)
As you no doubt guessed, this monthly buffered ETF is benchmarked to the Nasdaq-100 instead of the S&P 500.
That is an important distinction, considering that the S&P 500 gained about 16% in 2020, while the tech-heavy Nasdaq-100 gained more than 40%.
Investors who want exposure to this more dynamic index can do so with this Innovator ETF. There isn’t a February vintage available for trade as of this writing, so NJAN is the way to go right now with its Jan. 1, 2021 to Dec. 31, 2021 outcome period. It’s very likely a February-focused fund will roll out in the coming weeks for those interested in buying later on. Like the previous fund, NJAN comes with a 0.79% expense ratio.
FT Cboe Vest U.S. Equity Deep Buffer ETF, January Series (DJAN)
Innovator isn’t the only option out there when it comes to buffered ETFs, with First Trust offering a “deep” layer of protection that can help offset as much as 30% in declines across the given time period. DJAN’s underlying fund, which is likely familiar to most investors, is the SPDR S&P 500 ETF Trust ( SPY).
The monthly cycle isn’t as clean as innovator, so the January series actually just kicked off with a period from Jan. 19, 2021 to Jan. 21, 2022 and February will not start for another month or so. It’s also noteworthy that your deep protection comes with a significant upside cap of only about 8% on the maximum profits you can generate in a bull market.
If you’re more worried about losses in the coming year than taking part in a huge rally, this buffered ETF is worth a look. It has a slightly higher expense ratio, at 0.85%.
Innovator Laddered Fund of S&P 500 Power Buffer ETFs (BUFF)
If you couldn’t guess, this laddered fund takes the guesswork and active management out of buying buffered ETFs by holding all 12 of the monthly Innovator buffered ETFs benchmarked to the S&P 500 — and when they roll off, it replaces them with the newest vintage.
That means no checking the calendar to see what monthly series you own or if it’s time to reinvest in a different offering. It also means you benefit from diversification in the strategy, as sometimes the buffers are not as effective based on the timing of a market event in its life cycle.
If you’re not looking for a short-term hedge but instead a long-term risk reduction tool, BUFF may be a better choice than a monthly vintage. One thing to note, the fund comes with a higher expense ratio, at 0.99%.
Innovator Triple Stacker ETF – January Series (TSJA)
If you’re interested in a bit of downside protection but want to supercharge your upside, then this rather sophisticated Innovator ETF may be worth a look.
According to the fund’s documentation, TSJA seeks to provide triple upside exposures that look to add up to 100% each for three funds benchmarked to the S&P 500, Nasdaq-100 and Russell 2000 indexes up to a cap of about 18%. At the same time, it looks to limit downside exposure to the S&P 500 over the outcome period that spans 2021. It comes with an expense ratio of 0.79%.
This is a very small and niche fund, partly due to it sophisticated approach and how very specific your investing goals have to be for TSJA to make sense in your portfolio. If you’re not afraid of strange exchange-traded products and think your portfolio may benefit from diversified upside potential with limited downside, this fund may be worth a look. Just make sure to read the specifics, however, because this is not an ETF that is easily explained and should only be purchased by experienced investors who know what they’re after.
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