Buffer ETFs to Consider for Protecting Gains and Limiting Losses
With market uncertainty rising, Canadians can explore buffer ETFs as a stabilizing force within their portfolios.
Market uncertainty can be broadly defined as a state of doubt that causes investors and market participants to have difficulty assessing current and future market conditions, resulting in heightened market volatility.
At present, the Trump administration’s trade policy actions are causing reverberations across the market, with the consensus being that they will have a negative economic impact.
Since February 19th, the performance of U.S. equity markets has been on a precipitous decline. Presently, the S&P 500 Index is very close to correction territory—that is, down 10% from its recent high three weeks ago—while the NASDAQ has already entered aforesaid correction territory.
Given the adversarial tone the Trump Administration is taking with many of the U.S.’s allies, there is no clear evidence of a shift towards a trade resolution in the immediate future. The market realizes, as reflected in the rise of the Cboe S&P 500 Volatility Index, a barometer for market uncertainty.
Benefitting From Buffer ETFs
While the current market environment may cause many investors to feel trepidation, there are alternative ways to navigate this landscape other than fleeing to safe-haven assets.
Buffer ETFs seek to provide investors with the upside of an asset’s returns, generally up to a capped percentage, while providing downside protection on the first predetermined percentage of losses.
Simply put, investors trade in some upside for additional downside protection. However, buffer ETFs have an outcome period embedded within their investment strategy, typically one year, meaning that the stated caps and buffers apply only to investors who purchase on the rebalance date and hold the ETF throughout the entire outcome period.
Investors who purchase after the rebalance date will receive different caps and buffers based on the performance of the referenced index between the rebalance date and when they purchased the fund.
Buffer ETFs Available To Canadian Investors
For Canadian Investors, both First Trust Canada and BMO Asset Management offer Buffer ETFs. Regarding the former, First Trust Vest Fund of Buffer ETFs (Canada) ETF (Ticker: BUFR) is a fund of fund offering that provides unitholders with capital appreciation and exposure to U.S. large capitalization companies included in the S&P 500® Index through investment in an equally weighted portfolio of First Trust Vest Funds.
The fund will match the price return of the SPDR® S&P 500® ETF Trust up to a predetermined upside cap while providing a buffer against the first 10% of the decrease in the market price of the underlying ETF for approximately a one-year period.
The underlying funds that comprise BUFR are also available for purchase, namely, AUGB.F, FEBB.F, MAYB.F, and NOVB.F, providing a predetermined upside cap of at least 16%, respectively, while buffering against the first 10% of the decrease in market price of the underlying ETF, over a period of approximately one year.
BMO has built a Buffer ETF suite that provides investors with exposure to the large-cap segment of the U.S. equity market, namely the S&P 500 Hedged to Canadian Dollars Index. The suite provides a buffer against the first 15% of a decrease in the index’s market price over a period of approximately one year.
BMO’s Buffer ETFs suite includes the BMO US Equity Buffer Hedged to CAD ETF – January (Ticker: ZJAN), BMO US Equity Buffer Hedged to CAD ETF – April (Ticker: ZAPR), BMO US Equity Buffer Hedged to CAD ETF – July (Ticker: ZJUL), and BMO US Equity Buffer Hedged to CAD ETF – October (Ticker: ZOCT).
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
