Buffer ETFs Give Cash-Shy Investors a Way Back In

With the S&P 500 hovering near 7,500, plenty of investors are sitting on piles of cash, too nervous to put money to work near record highs. That tension was in focus during a May panel hosted by Goldman Sachs Asset Management and Innovator ETFs. Executives argued that buffer strategies, not bonds or cash, may be the better tool for advisors trying to get clients back into the market.

Key Takeaways:

• Cash has lost more than 25% of its value to inflation since the pandemic, panelists said.
• Bonds are mathematically capped near 4.5% to 4.75% annualized over the next decade.
• BALT’s 20% quarterly buffer has only been breached four times since 1950.

“Right now, if you’re an advisor, you’re coming into a client, maybe they just sold their business and they’re sitting there looking at this market with the S&P around 7,500 and they’re like, how can I pump my money in right now?” said Tim Urbanowitz, chief investment strategist at Innovator ETFs.

That hesitation comes with a cost, and the math behind staying in cash has shifted. Urbanowitz noted that since the COVID-19 pandemic, uninvested cash has lost more than 25% of its purchasing power to inflation, even as major indexes kept setting new highs.

See more: Investors Are Hiding Despite the Best Earnings in 10 Years

For advisors, the panel argued, that makes a defined-outcome or buffer ETF, which caps both losses and gains over a set period, worth a closer look as a way to ease clients back into equities or to replace part of a bond allocation.

Markets Move Faster Than They Used To

Alexandra Wilson-Elizondo, co-chief investment officer and co-head of multi-asset solutions at Goldman Sachs Asset Management, said the market itself has changed in ways that make old playbooks less useful. Index funds, systematic strategies and a surge in retail trading mean shifts that once took weeks now happen in minutes, she said.

Wilson-Elizondo also pointed to a fixed income problem advisors can’t ignore. Over the next decade, the Bloomberg US Aggregate Bond Index’s starting yield effectively locks in an annualized return of roughly 4.5% to 4.75%, Urbanowitz said, leaving little room for the kind of growth retirees may need.

There’s also a diversification gap. Of the last 28 market corrections of 10% or more, Urbanowitz said, rising interest rates were the trigger about half the time, a scenario in which bonds tend to fall alongside stocks instead of cushioning the blow.

The Retirement Playbook Needs an Update

The standard approach for clients nearing retirement, shifting from a 60/40 stock-to-bond mix to something like 30/70, comes with a cost, according to Urbanowitz. While it lowers risk, it also strips out much of a portfolio’s growth potential at a time when clients may need that growth most.

Instead of treating “bonds versus cash versus equities” as separate buckets, Wilson-Elizondo said her team builds portfolios around risk factors. The goal is avoiding duplicate exposures across public and private markets while keeping a defined cap on how much a portfolio could lose.

Where Buffer ETFs Fit

That’s where products like the Innovator Defined Wealth Shield ETF (BALT) come in, according to the panel. The fund resets every quarter, offering a 20% buffer against S&P 500 losses in exchange for an upside cap typically between 2.5% and 3% for that quarter, Urbanowitz said.

He added that the 20% quarterly threshold has only been breached in four calendar quarters since 1950. In 2022, when stocks fell 18% and bonds dropped 13%, BALT finished up 2.5% for the year, a result Urbanowitz described as proof the structure can act as an “all-weather” complement to a bond allocation.

For advisors, Urbanowitz said that the bigger picture is straightforward. “It’s getting clients invested and keeping them invested,” adding that buffer strategies give clients a way to participate in equity gains while keeping a defined floor under their losses, something that resonates with people who, in his words, “hate losing money.”

Originally published on Adviser Perspectives.

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