Analysis-Investors, advisors flock to 'buffer' ETFs as markets sell off

(Reuters) -Investors are increasingly taking refuge from the tumultuous U.S. stock market by pouring into a type of exchange-traded fund that offers a tradeoff, a cap on potential gains in return for a cushion against possible losses.
Over the past month, as the market has pulled back sharply, "buffer" ETFs have seen
On Monday, the S&P 500's biggest drop of the year, such buffer ETFs pulled in
"At some point, the stock market party had to stop," said
Buffer ETFs, which are offered by asset managers like
The extent of potential gains depends on the market backdrop, with higher volatility environments translating into lower upside potential as investors give up potential profits in exchange for more protection.
Financial advisors like Hughes are increasingly attracted to them as a way to persuade clients not to abandon stocks in a turbulent environment.
"A year ago, we were reaching out to them to tell them and their clients about the concept," said
In a survey of advisors conducted last week, Innovator found that 82% of advisors polled were more worried about stocks than any other asset class.
Stocks have sold off in recent weeks as investor worries about the economic outlook are exacerbated by uncertainty over President
"When you have these jolts, it creates a new level of both uncertainty and urgency," said
Total assets in buffer ETFs stood at
Fuse Research Network, an asset management research and consulting firm, said it expects inflows into buffer ETFs to nearly double this year.
The current volatility "is a reminder to have defensive solutions as part of a portfolio," said
That is what
"Until then, I didn't really want them, but I now believe that as long as the cap on the upside is at least as large as the average market return, I'll consider it," he said.
Currently, Chaussée said that about
"When valuations are high and caps are low -- well, you have to make a choice, but I come down on the side of not being greedy," he said.
"Having someone else cover the first 15% of any selloff sounds great, but in exchange for what?" he said.
Aside from limiting potential gains, buffer ETFs also tend to carry higher fees. The funds can have fees of 0.7% or more, compared to as little as 0.05% for a plain vanilla index ETF or as little as 0.35% for an actively managed ETF.
"You need to be aware of the volatility and risk of the markets these days, but you also want to be careful of what you're rushing into," Garrison said.
(Reporting by
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