Limiting Downside While Capturing Upside on the S&P 500
Structured products, including capital guaranteed ones, aim to limit losses to a preset maximum level, but the usual price to pay for this is sacrificing some upside. Allianz has a set of products limiting losses to 5% over a 6-month outcome period that does cap upside.
But Allianz has created a new product range that lets you “have your cake and eat it”, though it is not a completely “free lunch” because you might not participate in a year of small gains. You only get unlimited upside once a threshold level of returns is surpassed.
Buffer15 Uncapped ETF Series limits losses to 15%, based on a defined one-year outcome period. This means that the exact upside and downside will also vary with the timing of your investment.
AllianzIM U.S. Equity Buffer15 Uncapped Apr ETF has an “outcome period” of April 1 to March 31. The loss limit is only 15% at the start of the period. If the market has risen since then, the effective loss is larger, and conversely if the market has fallen since then, it has already eaten up part of the 15% loss, and the effective loss is smaller. Allianx does publish a table of current buffers, downside, and remaining outcome period for each product series which launches monthly.
For all of these products, the underlying investment is actually another ETF: SPDR S&P 500 ETF Trust, the world’s largest ETF. Presumably Allianz do not think they can improve on this ETF but do expect to add some value through using derivatives for risk management. CBOE FLEX Options are used to support the buffer. This range of options lets Allianz choose more precise strike prices, expiry dates and other details to exactly match the product’s buffers over the exact outcome periods.
The expense ratio of 74 basis points is many times higher than the 3 basis points (0.03%) charged by the underlying SPDR ETF. It is also a little higher than the average ETF, though investors - and especially those whose brokers may not give them access to options - may be prepared to pay a higher fee (and possibly miss some upside) for the convenience of knowing their maximum loss.
A minor nuance is that the 15% buffer is before fees, which increase the effective loss depending on the holding period. For instance, anyone holding the ETF for the full 12 months could have an effective buffer of 15.74%. Allianz does clearly publish the effective buffers on its website, which can change daily with the market distance from the buffer and the remaining fees over the remaining outcome period. Though these products are a bit more complicated than the headline suggests, all of the details are transparently published in a table that is easy to read.
Allianz launches a new buffer ETF every month, so investors who are looking to define their maximum downside should watch this space to pick the product that is the best match for their own return targets and risk tolerance.
