This is the latest in a series of columns about portfolio strategies, financial planning and asset management.
Buffered exchange-traded funds have soared in popularity in recent years, typically offering investors the opportunity to enjoy market gains, albeit with a set ceiling, while limiting losses during a downturn.
As Morningstar reported in February, buffer, or defined outcome, ETFs, which use options to limit investment losses in a specific period while capping gains, have grown to roughly $50 billion in assets from $5 billion in 2020.
A lesser-known buffer ETF variety — “uncapped” ETFs that limit downside market risk with no hard limit on upside returns — now may be gaining a foothold.
These products, which comprise only a small subset of the buffer ETF universe, offer investors an opportunity to participate in greater market gains — although, like any investments, they have costs and risks. And the “uncapped” aspect comes with caveats.
Allowing Bigger Gains
In early March, Allianz Life subsidiary Allianz Investment Management launched the AllianzIM Buffer15 Uncapped Allocation ETF (SPBU), a fund of funds offering advisors and investors “uncapped upside potential” on a buffered ETF.
The ETF, which has a 0.79% expense ratio, invests in a laddered portfolio comprising 12 AllianzIM U.S. Equity Buffer15 Uncapped ETFs, allowing for upside while providing a buffer against the first 15% of losses over a one-year outcome period.
Each month, one of the underlying ETFs resets its buffer, helping to smooth out market fluctuations and enhance risk management, the firm said. Investors can start to participate in the full market upside after a specific spread, or hurdle, which represents a minimum return that the underlying ETF must achieve.
“Markets in 2025 have been marked by heightened volatility as investors adapt to a new administration and navigate ongoing economic uncertainty,” said Johan Grahn, head ETF market strategist at AllianzIM. “Meanwhile, traditional core bond holdings are facing challenges, offering neither the growth nor the protection they once provided.”
Allianz isn’t alone in offering an uncapped buffer ETF.
“We were one of the early players to the game in the buffered space period and certainly the first player in the game when it comes to the uncapped buffered space,” TrueMark Investments CEO Mike Loukas said recently, noting that his firm introduced the first such fund over four years ago.
Uncapped, With Costs
Bryan Armour, who edits Morningstar's ETFInvestor newsletter, noted in an email that investors choosing traditional buffer ETFs were willing to give up some upside to protect against losses, “and that remains the case here. The difference for uncapped buffer strategies is they can capitalize on big years for the underlying index.”
While buffer ETFs may permit more participation in big market upswings by avoiding a hard cap, they do shave some potential gains.
AllianzIM’s spread “represents an opportunity cost for an investor,” the amount investors have to forgo in positive performance in return for the 15% downside protection, a spokesperson explained. “The spread replaces the cap that our other traditional buffer products have in place as the variable that will change each outcome period.”
Other uncapped buffer ETFs work by taking a ratio of upside instead of setting a hard cap, Morningstar’s Armour noted.
“For example, an investor of a 10% hard cap buffer ETF or one with 75% of positive returns would prefer the hard cap up to an index gain of 13.33% and an uncapped ETF beyond that,” he said. “There are tradeoffs between an uncapped and hard capped upside, neither of which is necessarily better. It’s just a different risk.”
Limiting Risk
The mainstream ETF industry hasn’t adopted the uncapped buffer ETF in a significant way, TrueMark’s Loukas noted.
His firm launched its TrueShares Structured Outcome (January) ETF(JANZ) in 2020. The fund, which also has a 0.79% expense ratio, and its sister uncapped buffer ETFs target roughly 10% downside protection by trading options tied to the S&P 500 index while providing uncapped potential gains. The ETFs capture about 80% of market upside.
“Everything we do is uncapped,” Loukas said.
TrueMark and Allianz, he added, are the only traditional ETF firms issuing uncapped buffer funds — with differing offerings. Investors who are bullish on U.S. large-cap growth equities and don’t want to remove the growth characteristics “may want to consider an uncapped approach,” Loukas said.
TrueMark regularly talks with advisors who were unaware of the firm’s uncapped buffer ETF, “and so part of the challenge for us is making sure that message gets out there, making sure that advisors and investors are properly educated on the approach,” Loukas said.
He cited three scenarios showing the differences in possible outcomes between capped and uncapped ETFs.
Both capped and uncapped ETFs with 10% downside protection offer the same buffer for a market downturn, Loukas noted. If the market goes up 10%, however, TrueMark’s uncapped ETFs would trail by 2 percentage points, as they capture 75% to 85% of the market upside.
The win for investors in the uncapped product comes when the S&P surges during the 12-month period covered by the ETF, even though they may capture only about 80% of the market gains, Loukas explained.
“When the S&P is up 24%, or it's up 38 or 39, because that's happened recently, we would win by a lot versus our peers,” Loukas said. “Investors don't get too worried about missing market performance by a couple of percent. They get really worried about missing it by 15% or 10%.”
Not Eliminating Risk
In a drastic selloff, buffer ETFs limit but don’t provide full protection against losses, since they would eliminate only a portion of the drawdown.
If the market experiences a black swan event, “then you are buffering out a portion of that drawdown, but you're capturing the rest of it,” Loukas said. So if the investor is sensitive to big drawdowns, ”there are other products that might be a better fit.”
Indeed, while buffer ETFs, capped or uncapped, may make sense for some investors, not everyone is a fan.
Better Options?
Morningstar recently suggested that buffer ETFs may appeal to extremely risk-averse investors or those with short time horizons but that most clients can find much less expensive ways to adjust portfolio risk, such as low-cost index ETFs.
Morningstar manager research analyst Zachary Evens said in an article on the firm’s website that there’s a narrow use case for buffer ETFs, which typically have high fees.
Leaders at AQR, the global investment management firm, recently called options-based strategies like buffer ETFs a bad deal that will likely disappoint investors “lured in by the overpromise of magical equity returns without equity risk and then overcharged for the pleasure.”
Better diversification may be the best option, they suggest.
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