Investors' Losses Could Be Limited By BlackRock's Buffer ETFs

There are currently six large exchange-traded funds to choose from, including the largest in the world, which are targeting a booming area in the $6.9 trillion industry: ETFs with a downside cap as well as a potential gain cap for investors. 

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A new fund known as the BlackRock Large Cap Moderate Buffer ETF and the BlackRock Large Cap Deep Buffer ETF has been proposed by BlackRock: a fund designed to reduce volatility in investors' returns. A Securities and Exchange filing reported that the two funds would track the performance of the iShares Core S&P 500 ETF (ticker IVV), using options to try to minimize those fluctuations. 

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Since the outbreak of the Covid-19 virus weighed on economic activity, followed by an increase in inflation, buffer ETFs have become increasingly popular. Investors sought safety during this period as well as soaring inflation, fueled by the pandemic-fueled turmoil. After the first fund in this category was launched in 2018, Trade Algo data shows, it now holds more than $20 billion in assets, attracting BlackRock to the category. 

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There are several reasons why the growth of ETFs has been tremendous; the most obvious reason is that clients and advisers want products with these characteristics, or that they're using similar products from their competitors. Trade Algo noted that the growth shows there is demand for such products.

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Specifically, the BlackRock Large Cap Moderate Buffer ETF aims to protect against approximately the first 5% of a S&P 500 ETF's quarterly losses, where as the BlackRock Large Cap Deep Buffer ETF is intended to protect against about the first 5% to 20% of annual losses of the large cap index. 

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Innovator ETFs, which pioneered the buffer ETF space with the launch of their first defined-outcome ETF in 2018, are the current dominant players in the buffer ETF market. Regulators have been scrutinizing buffer products and other relatively complex products like leveraged and inverse vehicles, among other products. 

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Neither the tickers nor fees for the funds were listed in the filing. Nate Geraci of the ETF Store (ETF Store.com) recognizes that BlackRock has a large share of the market on exchange-traded funds, which controls approximately $2.3 trillion across almost 400 of them.

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The president of Geraci, a leading investment advisor, said, “Buffer ETFs probably appear to be low hanging fruit, just too juicy of an opportunity to pass up.” In my opinion, BlackRock will significantly undercut the fees of existing buffer ETFs and will put a lot of marketing muscle into the effort to bring the ETF to market.”