The stock market volatility spike benefits asset managers offering “buffer” ETFs, which trade upside potential for downside protection.
In three years, assets in these products surged from under $10 billion to $41 billion, attracting recent inflows amid stock market volatility.
Since July, average weekly net inflows surged to $283M from $160M, peaking at $360M in the week ending Aug. 2.
The S&P 500 has dropped 5% this month due to U.S. economic worries and a global carry trade unwind.
“Our inflows last week were probably five or six times what we would see in a typical week,” said Graham Day, chief investment officer at Innovator ETFs, which launched the first buffer ETF six years ago.
Buffer ETFs use options to cap losses and limit gains, attracting investors and advisors to stay invested during volatile markets.
However, ETFs can absorb market hits during volatility, but long-term investors might miss upside, noted Zachary Evens of Morningstar.
“The risk is that they’re sold to investors who don’t need them, because they have a long-term time horizon,” Evens said. “There are no free lunches in investing.”
Even before this year’s bull market cracks, buffer ETFs grew rapidly, debuting 76 new products in 2024 with 9%-100% protection.
Recently, “capital protected” buffer ETFs have emerged, offering 100% downside protection but less upside potential.
“This is where we think the opportunity lies,” said Matt Kaufman, head of ETFs at Calamos Investments, which rolled out its first products of this kind earlier this year. “This selloff is the first real life test for these products, and so far they are doing exactly what we thought they would.”
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