The Litany of Buffered ETFs
The Risks You Can Control
In the previous essay that discussed Buffer Annuities as a Structured Product offered by insurance companies, I stated that the complexity, illiquidity and fees may not be worth it to objective investors. It should also be stated that annuities offer tax deferral and exemption from probate as possible benefits, but if they are purchased in a tax qualified plan, it doesn’t really matter.
If withdrawals are made, the distributions are treated as ordinary income – even if they can be attributed to capital gains. On top of that, revocable living trusts can solve the probate difficulties.
On the surface, they are compelling. The investor gains access to the growth potential of equity markets, reduced exposure to negative return markets, a wide range of choices to implement the results of their risk tolerance questionnaires, tax deferral and probate exemption, and possible death benefit options. But there’s a catch – and it’s a big one.
To learn more, I asked a licensed advisor for his favorite Registered Index Linked Annuity (RILA) and discovered this in the fact sheet: “Withdrawals from your contract value may be subject to withdrawal charges. The withdrawal charge declines from 8% over a 6-year period for . . . . . . Series B.” In my experience, this means that the brokerage firm handling the transaction was paid 6% of the annuity premium paid by the investor as a sales commission. In turn, the financial advisor was paid 40% to 80% of that as taxable gross income.
Most likely, Series B means that this annuity contract is priced by a similar method as B-share mutual funds - meaning a deferred sales charge that is paid up front by the insurance company and recouped through annual distribution fees that are charged to the contract owners. In this case, 8% over a 6-year period is 1.3% per year off the top of investment returns. In this scenario, the profit to the insurance company is 0.3% per year plus management fees and excess returns over the participation rates paid to the annuitants, but I’m not privy to the actuarial science of that.
Buffered ETFs
Because of the elegance of markets and the information of prices, the choices available to investors are vast and deeper than ever. In this case, there are other ways for investors to gain access to the growth potential of equity markets, reduce their exposure to negative return markets, and have it packaged. In addition, there are a wide range of choices to implement the results of their risk tolerance questionnaires and do it less expensively than annuities and some actively managed mutual funds.
As discussed in Chapter Seven of The Moneyball Method, the great chefs of Wall Street serve gourmet dishes that people want, and as mentioned in the previous article, “there is that nagging inclination to earn as much as possible or eliminate the possibility of losing money.” To concretize that, the buffered annuity contract referenced above offers two time periods, four levels of downside risk management, four equity market asset classes and seven step-up and participation rates. In other words, dozens of combinations, one of which may lead to a state of perfect peace, enlightenment, and freedom from suffering – or not.
And for intraday liquidity – meaning secondary market trading, buffered exchange trade funds - also known as defined outcome ETFs, are available with an even greater number of bells and whistles. To quote the investor guide of a leading company,
Investing in the market with a built-in buffer can be powerful. Without a buffer, if your portfolio declines, it subsequently needs to gain more than it lost to get back to even. However, the portfolio with a buffer (of 9%, 15%, or 30%) needs far less of a gain to get back to even after experiencing loss.
That is an important concept – and a theme of Chapter Five of The Moneyball Method. The gain needed to break even after a market value decline is greater than the magnitude of the decline itself. That helps explain why rational investors will forgo potential profits when the risk of loss is likely to be less than the potential gain. In turn, that may also help explain the huge popularity of buffered ETFs among financial advisors, investors and asset management firms.
In a bold move and a sign of the times, Goldman Sachs announced in December 2025 its plans to acquire a leading originator and manager of defined outcome exchange traded funds (ETFs) in a reported $2 billion deal. The company, Innovator Capital Management, had about $28 billion under their management at the time - and this is spread over 160 different ticker symbols. Those are because of the multitude of participation rates and buffers applied to several broad-market equity indexes and US Treasury bonds.
But the shareholders do not actually own the index securities. In many cases they own a synthetic in the form of deep in-the-money call options, bear put spreads, and short positions in deep out-of-the-money call options to help pay for the bear put spreads. Like integral calculus for quantum mechanics, I’m told that it works. And that’s just the beginning. You can ladder these, but that’s a subject for another day.
The Moneyball Method
Their expense ratios seem to gravitate around 0.89% (89 basis points) annually. To Moneyball investors, that’s 70 – 80 basis points higher than typical fund expenses, but there is an expense that is far more important to consider, starting with the usefulness of risk tolerance questionnaires.
However, none of them have the long-term historical data sets needed for calculating spending or risk capacity. That means that it is impossible to know how they correlate to an efficient portfolio of securities or if they avoid pointless risk or lifestyle sacrifice. And if they are not integrated with your cash flow strategy, there is no funding status or confidence level.
But for advisors or investors who are not concerned with explicitly defined goals, cash flow strategy, efficient markets, funding status or contingency plans, buffered ETFs may be a marvelous tool. Who knows? And not only for them, but also software providers that force guardrails on the random simulations of your spending goals. For details about that, stay tuned!