Understanding Different Types of Buffered ETFs

It's not about being the richest person in the graveyard.

It's about being able to be consistent with growth and lowering your

risk, especially at the beginning of your retirement.

Welcome to the Retire on Time podcast.

I'm Mike Decker here with David France and from Kendrick

Wealth. As always, text your questions to 913-363-1234.

And we will feature them on the show.

Just remember, this is not financial advice.

Do your research so you can do what is right for you.

David, what have we got?

Hey, Mike, what's the difference between a dynamic Buffer DTF and

a target outcome Buffer DTF getting technical here.

Yes, there are lots of little buzzwords there.

The, uh, the listener is getting much more sophisticated than

your maybe average advisor.

Dare I say, okay, yeah, I can't tell you how many times I've

said, hey, why don't you use Buffer DTFs?

The two answers I get from financial professionals are one.

What are those?

Two, I've, I've got a good thing going.

I don't, I don't need to learn all these.

Like, we're fine.

Oh, no, that complacency just tries me nuts.

So for all those who want to skip the advisor and go right to a tool that

may be used, basically, the whole concept of this is saying, I'm concerned

about a market top.

I want some protection.

And I don't know if bond funds are the right bit for me.

Okay, annuities, they're not liquid.

So that concerns me.

I'm looking for just a different way to go about it.

Structured notes are illiquid for a certain period of time.

I just want some protection mechanism in there.

Entry level and introducing Buffer DTFs.

Okay, all right.

Now, I think the majority of Buffer DTFs, just a quick shout out.

There's really two companies that do these pretty well.

You have first trust who they don't really advertise to the public.

So I'm just letting you know they exist.

They didn't endorse me to say this at all.

It's just you can Google first trust Buffer DTFs.

And you're going to see a whole array of them.

And then you've got Calimos.

Okay.

Calimos is another one, just Calimos Buffer DTFs.

They take up the majority of the market share and they do really well with

how they build them, price them, and so on.

BlackRock also has a couple that are out there.

They're entering the space as well.

So do we do we anticipate that more companies will start?

Yeah, I think so.

Yeah.

I think so.

This Buffer DTF in my mind is the securities world, their version of what

they fix indexed annuity has been doing for many years, providing upside

protection or upside growth potential with downside, not protection because

there's no guarantee on these.

It's just downside buffers or hedging against it.

So here's here's roughly what you what you'd expect is let's say you can get

up to 10% or up to let's say 14% of the S&P, but you're going to have

the first 10% on the downside Buffer DTFs.

So if the markets go down 9%,

you don't lose anything.

You just have the expense ratio.

If the markets go down 20%, the first 10% was buffered out.

So you would basically only lose 10% or half.

Okay.

So that's the idea is you're giving up some of the upside to have some downside

ahead or partial protection or protection within a certain range.

That's it.

Okay.

Let's not play with the game that this is better than it is.

It's just black and white, nice and simple.

And this is probably for people who need this money for their income.

They're retired.

No, this isn't really an income problem.

No product.

Yeah.

This is this is for portfolio.

We use it for the reservoir.

Oh, I see.

So that's our income necessarily play, but not everyone uses it for income.

This is more often a bond fund alternative.

So take your typical portfolio, 60% in stocks, 40% in bonds.

It's stock funds or equity funds.

Bond funds is typically what ends up being.

Well, bond funds are very good.

They're not very good.

I don't, I just, I don't like bond funds.

Generally speaking, there are times where it makes sense, but for the past decade,

most of the time in my opinion, they didn't make a lot of sense introducing buffer ETFs.

Okay.

Now the more protective or the less risky ones, they're typically called like max buffers.

Okay.

They're maximizing not 100%, but not as much as they can.

So you might get like 7% of the upside and 50% of the downside.

So these are target buffered ETFs.

The question was, was the difference target target buffered ETFs?

It's a one year point to point typically to where if you put money in or around the date

that it starts, that a year from now, if the markets go up, let's say it's a max buffer,

the markets go up 10%, you might have 7% because you're capped at seven.

Market goes up 20%.

You still around that seven.

And then you have to account for expense ratio.

So it feels the markets go down.

30%, you don't lose anything.

Just fees markets go down 50%.

You didn't lose anything, but fees.

If there was a 50% buffer, that buffer, that downside changes over time.

So you can't buy it and hold it with the same buffer.

Some years, it's like 90%, some years, it's like 50%, some years, it's 40%.

It's whatever the market allows them to buy in those.

So that pricing is going to affect the protection that you can possibly get.

Hence why they're not principle protected, but they offer

protective mechanisms to help from the downside.

Okay.

Now that's kind of the OG, the original, when it comes to the just structured one year,

it's it's almost always one year, very, very simple.

Then the dynamic buffers were coming out as well.

Dynamic buffer just says, well, what if we take one ETF for one fund

and we just blend all 12 months of the target buffers?

So it's not like you can't not go down, don't you love that double negative?

You're going to go up or down, but it's the hybrid or the compilation

of all of the 12 buffers in one, which basically says you've got upside growth

and it will take all of the pricing of all of the 12 ones and slowly let you grow

with the S&P.

But if the markets go down, you're not going to go down as much with it

because that dynamic nature of a lot of it being buffered out.

So it would slow down the decay of a market collapse.

All right.

So I'd love to give you hypothetical, just rough examples.

I don't want to, you know, promise anything or say something that can't illustrate.

All right.

Okay.

So that's that's the tricky part with this.

But you can look up.

Here's, I mean, here's a couple of them.

So you've got from first trust buff, D, B, F, D and B, F, V.

So buff D is better for a deeper crash.

Buff V is for a lower crash.

Those are the first trust dynamic buffer ETFs.

IVVM is one from BlackRock.

That's also pretty popular.

And then IVVM and more dynamics.

So it's more like the buff, buff V as in Victor.

It's going to slow on the downside, but you're not going to get all of the upside

or as quick of the up as much of the upside as possible.

You're going to kind of cap out of them if the markets have great returns.

Okay.

So all things considered what I appreciate about this is the humble investor

who says we may be at a market top.

I'm not trying to get rich.

I'm trying to stay rich.

I'm not going to try and time the market, but I want to slow down the downside risk.

So they might instead of having 60, 40 split, say, well, gosh,

maybe I'll have 50 or 40% in stocks.

And instead of my bond funds, I'm putting in buffer ETFs.

And they're just doing a different version of an allocation plan

that just has these that are, I want to say more stable.

They're not, they're not fixed income.

They're just, they've got less downside risk,

even though they're giving up some of the upside potential growth.

They have a smaller range of what they could do.

That's what I was just going to say.

It sounds to me like the, the, when you look at a typical, like,

line of stock valuations, right, it can be like a roller coaster.

It sounds like maybe the roller coasters are much smaller on a buffered.

Yeah, you're, you're downgrading from the six flags thriller to the Snoopyland kid ride.

Okay.

You're not going to get hurt on that one.

No, but that's okay.

I mean, when you're retired, it's not about being the richest person in the graveyard.

It's about being able to be consistent with growth

and lowering your risk, especially when you retire at the beginning of your retirement.

Because that's when you have the most longevity risk.

If you're 80 years old, 85 years old, and you've got like five years left,

and you could just ladder all that out with like CDs, right?

Because you have enough money.

You're not going to spend all your portfolio could be very different than someone

who's 60 years old.

It might have 20 to 30 years where they need their money to last.

They can't take it on the chin with a significant market crash.

So buffered ETFs, I have found to be an effective tool to incorporate any growth

portfolio just to bring a different element to lowering the volatility.

Yeah.

The roller coaster.

Yeah.

And do we think or do we know like if these are similar to bond funds, it is one

cheap and they're not technically similar to bond funds.

Oh, yeah, yeah.

Because it's equities with option contracts that are the buffers.

Bond funds are debt instruments.

It's a different asset class altogether.

Okay.

Yeah.

Great.

Okay.

Great point there.

And are there is one more expensive than the other like is the expense ratio of a

buffer ETF?

Would it be less than maybe a bond fund or I mean, some bond funds can be very

pricey, but generally speaking bond funds or ETFs are cheap, cheap, cheap.

Okay.

All right.

And buffered ETFs, not as cheap.

Oh, okay, okay.

But if you look at net of fee performance, I would wager that bond funds have more

growth, potential net of fees.

And the reason is if bonds have averaged two or three percent year over year,

and you might expect, let's say a max buffer ETF that has up to seven percent

growth, 50% downside buffer.

If you have that for a couple of years, you might average on five percent growth

net of fees might keyword.

These are very general assumptions.

Situations are going to change, but I would, I believe buffered ETFs have more

growth, potential than bond funds.

They both have risk.

They both have benefits and naturalments.

But yeah, dynamic is more of a sudden forget it.

Nice long term strategy, nice long term play target is more very rigid.

From this point to this point, this is what I'm getting.

And those play it well into different scenarios for different types of investors.

Thank you for watching this show.

If you enjoyed it, make sure to tell a friend, leave a rating, subscribe to us,

or comment if you want, heck, put your questions in the comments.

Have a good time there.

We'll read them and get back to you on that.

As always, we want to thank you for spending your time.

Your most precious asset with us today.

We'll see you in the next episode.

So, we'll see you in the next episode.