Loss aversion—the idea that losses hurt more than gains feel good—is one of the most popular findings in behavioral finance. While nobody wants to experience losses, calculated risks are essential to optimize risk-adjusted returns and reach financial goals.
Buffer ETFs mitigate loss aversion by buffering downside risk and capping potential returns. Using stock options, these funds provide downside protection on the first predetermined percentage of losses while capping returns at a predetermined percentage.
Most buffer ETFs have a one-year outcome period, meaning the caps and buffers apply only to investors who purchase on the rebalance date and hold the ETF throughout the entire outcome period. After the rebalance date, the caps and buffers vary based on market conditions.
Providing Better Exposure
BlackRock recently launched two new buffer ETFs—the iShares Large Cap Moderate Buffer ETF (IVVM) and the iShares Large Cap Deep Buffer ETF (IVVB) — to provide buy-and-hold investors with more flexibility and clearer financial outcomes.
“Whether you are nearing retirement or a first-time investor, market volatility remains a top concern for investors,” said BlackRock Head of Americas ETF and Index Investments Dominik Rohe when announcing the launches. “iShares buffer ETFs unlock access to institutional-quality risk management solutions in a convenient ETF wrapper, helping investors play defense and, more importantly, stay invested during turbulent market conditions.”
| Fund Name | Ticker | Referece Asset | Downside Buffer Range | ER % |
|---|---|---|---|---|
| iShares Large Cap Moderate Buffer ETF | IVVM | S&P 500 (IVV ETF) | 0% to -5% | 0.50% |
| iShares Large Cap Deep Buffer ETF | IVVB | S&P 500 (IVV ETF) | -5% to -20% | 0.50% |
Unlike conventional buffer ETFs, the new actively managed funds reset quarterly rather than annually, resulting in more frequent adjustments to their buffer ranges than their competitors. The result is better protection against ongoing volatility.
The ETFs also offer more flexibility. The moderate buffer fund offers protection against the first 5% of quarterly losses, which could appeal to those with moderate loss aversion. Meanwhile, the deep buffer offers protection against losses ranging from 5% to 20% for more protection.
These ETFs compete with popular buffer ETFs, such as:
| Name | Ticker | Type | Active? | AUM | YTD Ret (%) | Expense |
|---|---|---|---|---|---|---|
| FT Cboe Vest Fund of Buffer ETF | BUFR | ETF | Yes | $1.65B | 14.6% | 1.05% |
| Innovator U.S. Equity Power Buffer ETF - July | PJUL | ETF | Yes | $978.95M | 14.8% | 0.79% |
| Innovator U.S. Equity Power Buffer ETF - August | PAUG | ETF | Yes | $807.87M | 12.8% | 0.79% |
| Innovator U.S. Equity Power Buffer ETF - November | PNOV | ETF | Yes | $659.33M | 14% | 0.79% |
| Innovator U.S. Equity Power Buffer ETF - December | PDEC | ETF | Yes | 634.03 | 13.2% | 0.79% |
Growing Active ETF Suite
BlackRock has been steadily growing its active ETF portfolio over the past few years. For instance, the BlackRock Ultra Short-Term Bond ETF (ICSH) has $6.15 billion in assets while the BlackRock Short Maturity Bond Fund (NEAR) has $3.7 billion.
In addition to active bond funds, the world’s largest asset manager launched a series of active equity and alternative investment funds, including the BlackRock Large Cap Value ETF (BLCV), and the BlackRock Flexible Income ETF (BINC).
BlackRock’s new buffer ETFs are part of a new push into outcome-oriented products, including the industry’s first buy-write fixed income ETFs targeting Treasuries and corporate bonds, providing bond investors with more income potential.
The Bottom Line
BlackRock’s new buffer ETFs provide long-term investors with a way to mitigate losses while remaining in the market. Unlike other buffer ETFs, they reset quarterly rather than annually, providing better exposure to market conditions.