What do you think about the Buffer ETFs offered by BMO? Are they suitable for a retired investor who wants some downside protection and is comfortable with limited returns in a strong market scenario? Are their AUMs adequate to consider a purchase? BMO has three such ETFs: ZAPR, ZJAN, and ZOCT. Or are there other 'better' ETFs that have lower MERs, as the three cited have rather hefty MERs?
Thanks as always for your insight.
Buffer ETFs use options to protect against downside volatility. To get this protection, investors give up some potential gains (returns are capped). In BMO's case, the downside protection is 15% and beyond that no losses will be realized. But on the upside the gains are capped at 9% to 10.5% depending on the ETF. The largest ETF right now is ZOCT at $28M. We would still be very cautious on size and see how these grow. While we have no particular issue on how these are set up, as noted fees are high and frankly we just do not think investors need the protection offered. 15% declines are in fact quite rare. But returns above the 'cap' can be significantly more, and investors are potentially giving up a lot. For example if we use ZOCT as a US stock proxy, we count only three years of the S&P 500 Index that were down more than 15% since 1990 (2002, 2008, 2022). But we count 19 years ABOVE the 10.5% biggest cap on these ETFs, including multiple years above +25%. During these 33 years an investor in these funds (if they were available) would have been significantly behind. But, for nervous investors they may serve a purpose in the future once they get bigger. We just would not consider them necessary at all. A low volatility ETF such as ZLB (fees 0.39% vs 0.65%) is better, in our view. But it comes down (as usual) to risk tolerance and timeframe.