The What, Why, and How of Buffered ETFs

2023 was a banner year for the S&P 500 and finished Q1 of this year up nearly 10% YTD. But this rebound followed a year with the fourth worst returns in the index’s history in 2022. While the market is currently holding strong as interest rates remain steady, uncertainty and the chance of volatility remain. Many investors may still feel a need to hang onto their risk aversion this year, especially as we wade through an election year and wait to see if and when the Federal Reserve follows through on its promise to cut rates.

But risk aversion doesn’t have to come without upside potential, thanks to Structured Outcome ETFs. Buffered ETFs typically protect investors from the first 10-20% of downside. Others, such as TrueShares Structured Outcome product suite, allow for the potential of upside gains, which we believe can make quite a difference to total return. TrueShares’ Structured Outcome ETFs aim for a 10% downside buffer and take a unique approach in allowing gains on the upside with a participation rate for each ticker in the series. It’s that participation rate that we feel can make Structured Outcome ETFs a game-changer for long-term returns.

The purpose of a structured outcome ETF is to try and help mitigate risk with the downside buffer and allow for upside gains with a participation rate. It can be a solid option for a diversified portfolio, particularly for investors with risk aversion, like retirees. Prior to retirement, people are in the business of accumulating wealth that they can live on once they stop working. Naturally, retirement sees a decline in savings as they live out their glorious non-working years. We believe that a great time to invest in a Structure Outcome ETF may be during the transition period between preparing to retire and easing into retirement.

For extra precautions, many more investors are holding cash instead of equity. But an investor can make room for a Structured Outcome ETF in their portfolio by repositioning a modest amount of cash, fixed income, or existing equity allocation to increase the potential upside while maintaining risk levels. Our Structured Outcome ETFs can also fit into a portfolio by repositioning riskier equity exposure. These strategies can help diversify a portfolio, which can make it more resilient. 

We believe that investors of traditional ETFs might make investment decisions they later regret when their portfolio starts to see volatility. A dip in the market might push investors to sell low and force them to buy high later. In our opinion, Structured Outcome ETFs can protect against the downside risk, which may instill confidence when one might otherwise be tempted to pull out of the market. The upside potential can provide a unique opportunity for risk averse investors to not miss out on the upside when the market is going strong. Our Structured Outcome ETFs can help accommodate both up and down markets, in an unpredictable world.