Buffer ETFs Give Cash-Shy Investors a Way Back In

"Right now, if you're an advisor, you're coming into a client, maybe they just sold their business and they're sitting there looking at this market with the S&P around 7,500 and they're like, how can I pump my money in right now?" said Tim Urbanowitz, chief investment strategist at Innovator ETFs.

That hesitation comes with a cost, and the math behind staying in cash has shifted. Urbanowitz noted that since the COVID-19 pandemic, uninvested cash has lost more than 25% of its purchasing power to inflation, even as major indexes kept setting new highs.

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For advisors, the panel argued, that makes a defined-outcome or buffer ETF, which caps both losses and gains over a set period, worth a closer look as a way to ease clients back into equities or to replace part of a bond allocation.

Markets Move Faster Than They Used To

Alexandra Wilson-Elizondo, co-chief investment officer and co-head of multi-asset solutions at Goldman Sachs Asset Management, said the market itself has changed in ways that make old playbooks less useful. Index funds, systematic strategies and a surge in retail trading mean shifts that once took weeks now happen in minutes, she said.

Wilson-Elizondo also pointed to a fixed income problem advisors can't ignore. Over the next decade, the Bloomberg US Aggregate Bond Index's starting yield effectively locks in an annualized return of roughly 4.5% to 4.75%, Urbanowitz said, leaving little room for the kind of growth retirees may need.

There's also a diversification gap. Of the last 28 market corrections of 10% or more, Urbanowitz said, rising interest rates were the trigger about half the time, a scenario in which bonds tend to fall alongside stocks instead of cushioning the blow.

The Retirement Playbook Needs an Update

The standard approach for clients nearing retirement, shifting from a 60/40 stock-to-bond mix to something like 30/70, comes with a cost, according to Urbanowitz. While it lowers risk, it also strips out much of a portfolio's growth potential at a time when clients may need that growth most.

Instead of treating "bonds versus cash versus equities" as separate buckets, Wilson-Elizondo said her team builds portfolios around risk factors. The goal is avoiding duplicate exposures across public and private markets while keeping a defined cap on how much a portfolio could lose.

Where Buffer ETFs Fit

That's where products like the Innovator Defined Wealth Shield ETF (BALT) come in, according to the panel. The fund resets every quarter, offering a 20% buffer against S&P 500 losses in exchange for an upside cap typically between 2.5% and 3% for that quarter, Urbanowitz said.

He added that the 20% quarterly threshold has only been breached in four calendar quarters since 1950. In 2022, when stocks fell 18% and bonds dropped 13%, BALT finished up 2.5% for the year, a result Urbanowitz described as proof the structure can act as an "all-weather" complement to a bond allocation.

For advisors, Urbanowitz said that the bigger picture is straightforward. "It's getting clients invested and keeping them invested," adding that buffer strategies give clients a way to participate in equity gains while keeping a defined floor under their losses, something that resonates with people who, in his words, "hate losing money."

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