Anyone buying these types of ETFs?
Was mostly insurance products until now.
https://archive.ph/kIj3O
Matt Levine Today
https://archive.is/OUERsBuffer fund
A well-known bit of derivatives magic — a great, simple party trick that derivatives structurers can use to impress their friends — is that if you give me $100 today, I can invest $91 of it in two-year Treasury notes paying 4.75% interest, and in two years I will have $100.[1] And I can invest the other $9 in two-year at-the-money[2] call options on the S&P 500 stock index, options that gain value if the S&P goes up over those two years. Those options cost, let’s say, 13% of the price of the S&P today,[3] so spending $9 on options will get me an option on about $70 worth of the index. And so I can offer you the following trade:
You give me $100 today.
In two years, I give you back (1) $100, no matter what, plus (2) 70% of the return on the S&P 500 index, if it’s up.
If stocks go up, you get the gains (well, 70% of them). If stocks go down, you don’t get the losses. What a great trade!
And because I can do this efficiently in size, and because I thought of it and you didn’t, and because I advertised it to you with a cool brochure, I can charge you like 1% of your money for putting this trade together. It is a very good trade, honestly. If you are a sophisticated investor you can quibble with it,[4] but at a simple intuitive level it is just nice. “You get [much of] the upside of stocks, but no downside” is a clean and satisfying pitch. The shape of the payoff graph is pleasing.
Bloomberg’s Vildana Hajric and Emily Graffeo report:
The pioneer of the world’s first “buffer ETFs” — exchange-traded funds that are supposed to limit losses during market selloffs — has launched a new product which it says offers investors complete downside protection.
Investors in the $7.5 trillion ETF universe can now put money behind the Innovator Equity Defined Protection ETF, which began trading under the ticker TJUL on Tuesday. The offering comes from Innovator Capital Management, which launched the first so-called buffer ETFs, also sometimes referred to as defined-outcome funds, in 2018.
Buffer funds, as the name suggests, offer buffered exposure to stocks by limiting investors’ downside risk while also capping upside potential. …
Yet, Innovator says that its TJUL fund — which will track S&P 500 returns up to a capped percentage over a two-year period — will be the first of its kind to protect against 100% of stock losses. TJUL’s cap on potential gains is estimated at about 15% after fees.
Specifically, the fund will invest at least 80% of its net assets in options on the $423 billion SPDR S&P 500 ETF Trust (ticker SPY), according to the fund’s prospectus. TJUL can purchase and sell a combination of call and put options in an effort to cushion against market volatility.
The outcomes set by the fund may only be realized by investors who continuously hold shares of TJUL from the first day of the “outcome period” — July 18 — to the end of the two-year period, which is June 30, 2025, reads the prospectus.
They give you 100% of the gains up to the cap, rather than 70% of uncapped gains, but same basic idea.[5]
There is a reason that this product is the first of its kind: If interest rates are zero, I can’t invest $91 in Treasuries to get back $100, so I don’t have $9 to spend on options to get S&P 500 upside. (I have to put, like, $99 in Treasuries, and the only way to get you any meaningful upside is by giving you some downside risk too.) But as interest rates have gone up, products like this look better, and so people are offering them.
Of course as interest rates have gone up, products like this are in some sense less attractive: Putting up $100 and getting back $100 in two years is worse if I missed out on 4.75% interest than it would be if interest rates were zero.[6] But that’s not the point! The point is that a trade like “I will give you some stock upside and take 75% of the downside between down 5% and down 20% blah blah blah” is annoying and complicated, while “I will give you the upside of stocks and you can’t lose any money” is nice and simple and intuitively attractive. “Buffer fund” is complicated, “stock fund but you can’t lose money” has an obvious appeal.
