Investing

Stability on Sale: BlackRock Entices Investors With Discounted Buffer ETFs

Liam Gibson

Published: July 5, 2023 10:47 pm

Stock investors seeking affordable limits on their downside risk will like the look of BlackRock’s latest exchange-traded fund (ETF) offerings.

The world’s largest asset manager has released two new low-cost buffered ETFs to mark the halfway point of the trading year. 

The iShares Large Cap Moderate Buffer ETF (IVVM) and iShares Large Cap Deep Buffer ETF (IVVB) were released on June 30, delivering buffered exposure to the leading S&P 500 market index as BlackRock’s flagship iShares Core S&P 500 ETF (IVV) fund does. 

The light armor of IVVM aims to shield investors from the first 5% of quarterly losses. The heavy-plated IVVB offers further protection, offsetting 5-20% quarterly losses. 

They both come with expense ratios of 0.5%, a substantial discount as compared to the roughly 0.8% fee ratio charged by most competing buffer ETFs. The outcome period is another differentiator. Unlike many rival funds, BlackRocks’ new offerings will reset on a quarterly rather than an annual basis.

BlackRock’s foray into buffered products comes amid lingering uncertainty over the near-term direction of the U.S. economy. Despite equity’s strong performance in the first half of the year, the investing behemoth sees unmet demand for stability from investors who remain weary after 2022’s bruising market rout.

“Last year served as an important reminder that diversification alone may not protect investors against downside,” said Mark Alberici, Head of U.S. Product Innovation and Development at iShares, told VettaFi. “Today, there is a record amount of cash on the sidelines as heightened recession risk and uncertainty around interest rates continues to challenge investors. iShares buffer ETFs are designed as buy-and-hold strategies, helping investors stay invested across all market cycles.” 

Buffering the Headwinds

Buffer ETFs, also known as defined outcome ETFs, act as volatility guardrails for market participants. In exchange for capping upside gains, they provide a floor for total losses over a period, typically one year. These ETFs use options to mitigate the extremes of price volatility, and although they reset at the end of an outcome period, they can be held indefinitely. 

Their popularity has soared in recent years since Innovator ETFs first floated their first defined outcome offering in 2018. First Trust and Allianz also compete with their own defined outcome funds in the booming space. 

Last year’s broad downturn brought on a large influx, with buffered products seeing inflows of $11.1 billion in 2022. That momentum has carried through, with around $4.6 billion of capital entering the segment in the first half of this year.

There are now close to 200 such funds in the U.S., managing around $28 billion in total assets, according to CFRA ETF data analyst Aniket Ullal.

Yet the product segment could surge further still. BlackRock’s entry into the space may yet trigger intensified price action as rival fund managers aim to stay competitive. 

Traders who prioritize price stability for their portfolio stability will be keen to keep an eye out for more discounted buffer products that may launch in the near future.

Originally posted on Wealth of Geeks.