To hedge against recent market volatility, investors should consider using buffer ETFs.
Bruce Bond, CEO of Innovator ETFs, sees exchange-traded buffer funds as an opportunity to provide some protection against market declines.
“This (strategy) suits a group of people who are interested in getting exposure to the market but don’t want to take the full market risk,” Bond told CNBC’s “ETF Edge” on Wednesday.
Innovator ETFs issue buffer ETFs on a monthly basis. Their August ETF operates under the ticker symbol PAUG and offers 15% downside protection.
“If someone wants to invest in the S&P 500, they can do so directly,” Bond said. “They have 15 percent downside protection and 12.8 percent upside potential.”
Bond recommends investors hold these ETFs until year-end as the funds are built around one-year options within the portfolio.
“At the end of the year, the options are fully valued, and then we reset them for the following year,” Bond said. “In August of next year, they are fully valued, then we reset them for another year.”
Mark Higgins of Index Fund Advisors expressed skepticism about strategies such as buffer ETFs that allow investors to hedge against volatility.
“My concern is that many investors are creating a very expensive solution to what is ultimately a simple problem,” said the senior vice president of Index Fund Advisors in the same segment. “They need to be better able to cope with the normal volatility of the markets.”
Higgins believes there are more cost-effective solutions to navigate market uncertainty. The most cost-effective is to not look at your portfolio too often and to talk to your advisor before taking drastic steps out of surprise or fear.
“I think financial advisors doing their jobs can provide peace of mind,” Higgins said.
