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Financial advisors have begun to embrace the concept of buffered ETFs. These specialty funds track equity indices, capping the potential upside, which pays for downside protection (the buffer) if the index experiences a decline.

While this concept has practical portfolio applications, these funds have another unique feature advisors should know about: they mature (and reset).

A buffered ETF has a stated cap and buffer that stays in place for a specific period, in many cases one year. This means the cap and buffer reset at the end of the period (at maturity). It also means that investors buying the ETF any time after the first day of the period should be aware of the remaining cap and buffer for that ETF for the rest of the period they bought within.

Here’s an example: let’s say a fund that caps its return for the year at 10% has already experienced a 5% decrease since the start of the period. An investor purchasing the fund at that point has a 15% cap for the remaining period – this is a good thing. The opposite is also true. Had the fund already experienced an 8% gain in the period, the buyer would only have the potential to gain 2% for the remainder of the period.

Finsum: Buffered ETFs have a unique feature that every financial advisor should know about: they have a maturity date when their upside cap and downside buffer resets.

Buffered ETFs are a relatively new type of fund that offers a unique risk-management approach. These funds track an underlying index to replicate its performance while providing a "buffer" against significant losses. However, this protection comes at a cost, as the fund's upside is capped at a predetermined level.

As investor interest in buffered ETFs has grown, fund providers have diversified their offerings by tracking various indices and offering a range of buffer and cap levels. Several applications for these funds have also emerged, such as the ability to put cash to use that might otherwise be held out of the market.

Investors in or nearing retirement are particularly susceptible to market volatility, often resorting to holding cash to protect against short-term market fluctuations. While providing protection, this strategy also prevents them from participating in potential market growth.

Buffered ETFs bridge this gap, allowing investors to enjoy market gains up to the defined cap while safeguarding against substantial losses. With this level of protection built into the fund, investors may have more confidence to transition a portion of their portfolio out of cash and back into the market.

Finsum: Investors in or near retirement who fear market downside now have a place to invest that cash they have been holding on the sidelines: buffered ETFS.

For income-seeking investors, navigating the often volatile capital markets can be a tightrope walk between yield and stability. Enter income-producing ETFs, a potent blend of diversification and dependable returns. These innovative funds package high-yielding assets into a single, tradable security, offering investors a steady income stream without the burden of individual security selection.

One of the key strengths of income-producing ETFs lies in their inherent diversification. By spreading investments across a basket of assets, they mitigate the risks associated with individual maturities or underperformance. This eliminates the headache of reinvesting maturing bonds at potentially lower rates, a common pitfall for fixed-income investors.

Furthermore, income-producing ETFs typically hold less cash than their mutual fund counterparts. This seemingly minor distinction translates to a potentially significant advantage: reduced cash drag. Unlike mutual funds, which often require a cash cushion to facilitate redemptions, ETFs minimize uninvested capital, ensuring a greater portion of your portfolio actively generates income within its intended asset class.

Financial advisors seeking to craft reliable income streams for their clients should consider income-producing ETFs as a possible solution. They provide instant diversification, mitigate reinvestment risk, and maximize income potential through reduced cash drag.

Finsum: Income-producing ETFs can provide both diversification and steady returns with reduced reinvestment risk and cash drag.

For investors nearing or in retirement, navigating the delicate balance between capital preservation and growth can be a tightrope walk. While holding ample cash provides comfort during market downturns, it risks missing out on potential gains. Enter the buffer ETF, a unique investment vehicle offering shelter from storms while still allowing a path to sunshine.

These ETFs, also known as defined outcome ETFs, employ options to create a buffer against market declines. A typical fund might protect holders against, say, the first 9% of losses. But just like insurance, this protection comes at a price.

Unlike regular ETFs that track an index precisely, buffer ETFs also cap their upside potential. So, if the market soars, the fund will only capture a percentage of that gain. It's a trade-off: limited sunshine for guaranteed cover during rain.

Of course, buffer ETFs aren't a magic bullet. Their complexities require careful research. Fees, the specific buffer and cap levels, and the underlying index all affect their performance. As popular as the concept has become in recent years, more than 200 of these funds now exist offering a wide range of features. For advisors looking for a way to offer their clients downside protection, buffer ETFs are worth a look.

Finsum: A new category of exchange traded funds, buffer ETFs, has been growing in popularity due to their downside protection and ability to share in upside gains.

Exchange-traded funds (ETFs) have revolutionized the asset management landscape over the past decade, and their rise shows no signs of slowing. As Oliver Wyman's 2023 report, "The Renaissance of ETFs," underscores, ETFs have become the single most disruptive trend in the industry. By the end of 2022, total ETF assets under management (AUM) in the US and Europe reached a staggering $6.7 trillion, propelled by a 15% compound annual growth rate (CAGR) since 2010.

While passive ETFs currently dominate the market, holding 59% of assets (at the end of 2022), Oliver Wyman predicts a surge of active strategies. The report posits that the ETF landscape is entering a "next stage of growth," fueled by the emergence of innovative active ETFs.

Several factors contribute to the enduring appeal of ETFs in the US. Compared to mutual funds, ETFs enjoy lower investment minimums, typically lower expense ratios, and attractive tax advantages, making them highly accessible and cost-effective options.

Oliver Wyman projects this momentum to continue, with ETF growth remaining in the 13-18% annual range for the next five years. By 2027, they expect ETF AUM in the US and Europe to reach an impressive $12-$16 trillion, solidifying their position as a powerful force shaping the future of asset management.

Finsum: Active ETFs are poised to fuel the growth of this popular investment vehicle, according to global consultancy Oliver Wyman.