The BufferLABS 100 Index declined 2.44% on November 5, against a 4.36% drop in the S&P 500. The BufferLABS index follows the largest 100 buffered ETFs linked to the S&P 500. Every fund in that group outperformed the S&P 500, and the strongest performer declined just 0.52%. However, investors may have received less downside protection than expected. The wide differences between funds showed the limits of assessing protection solely through advertised buffer levels.
BufferLABS found that buffer type explained the largest differences in performance. Maximum-buffer funds provided substantially stronger protection, while funds offering standard buffers of 9% to 10% performed worst. Grant Ogard, BufferLABS co-founder, ranked position within the outcome period as the next most important factor. Ogard said funds offering identical buffers performed differently according to the market's position relative to the funds' initial levels and caps. Ogard said the market's path after the reset mattered more to those differences than the time remaining before the next reset.
An advertised 10% buffer does not guarantee immediate protection against a 10% decline whenever an investor buys. Investors buying partway through an outcome period can encounter a substantially different balance of risk and potential return. Ogard said a fund calculates the buffer and cap using the original starting level, not the investor's purchase price. Ogard said entry is least attractive after the underlying market has climbed substantially above that level. Ogard said little upside then remains, while a decline must first eliminate the accumulated gain before the buffer provides protection. That mechanism helps explain why some conventional buffered ETFs incurred most of the November 5 market decline despite advertising downside protection.
A conventional ETF's 10% buffer is designed to cover the underlying index's first 10% loss relative to the outcome period's starting level. That protection is measured when the outcome period finishes. Ogard said buffers perform best during gradual, orderly declines when each year's loss approximates the buffer size, because protection renews each period. However, investors bear losses exceeding the buffer when a market decline passes that threshold within one period.
The underlying options make protection less certain before the outcome period ends. Ogard said protection does not disappear entirely at one specific point before the reset. Ogard said protection instead becomes progressively less effective as the underlying index moves farther below the buffer's lower boundary.
Downside protection also requires investors to accept less participation in market gains. BufferLABS found that maximum-buffer funds missed roughly half the market's gains this year. Ogard said the trade-off is most beneficial during sustained, moderate declines and most costly during strong rallies, when the cap limits returns. Dynamic-buffer strategies seek to reduce that limitation. However, dynamic-buffer strategies generally offer less protection than maximum-buffer funds and have comparatively short performance histories.
Investors should assess reset dates, remaining buffers and remaining upside caps instead of depending solely on advertised protection. Ogard said investment risk includes both suffering too much of a decline and capturing too little of a rally.
S&P 500 Drop Exposes Risks in 10% Buffered ETFs
BenzingaShare
Summary
On-chain data shows the BufferLABS 100 Index dropped 2.44% on November 5, outperforming the S&P 500’s 4.36% plunge. The index tracks the top 100 buffered ETFs tied to the S&P 500. Every fund in the group beat the index, with the weakest down just 0.52%. On-chain analysis reveals maximum-buffer funds offered better protection than standard 9%-10% buffer products, which fared worst. Grant Ogard of BufferLABS explained that buffer levels are based on the original index level, not the investor’s entry price, exposing risks when entering after a market rally. Buffer protection fades as the market falls below the buffer zone before the outcome period ends. Investors give up some upside for this protection, with max-buffer funds missing about half of the year’s gains.
Source:Show original
Disclaimer: The information on this page may have been obtained from third parties and does not necessarily reflect the views or opinions of KuCoin. This content is provided for general informational purposes only, without any representation or warranty of any kind, nor shall it be construed as financial or investment advice. KuCoin shall not be liable for any errors or omissions, or for any outcomes resulting from the use of this information.
Investments in digital assets can be risky. Please carefully evaluate the risks of a product and your risk tolerance based on your own financial circumstances. For more information, please refer to our Terms of Use and Risk Disclosure.