How ‘Buffer Funds’ Protect Against Market Volatility
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Here's your money briefing for Thursday, September 8th. I'm J.R. Whalen for The Wall Street Journal. This year's volatile stock market has many investors looking for safety, or at least a way to smooth out the bumps in the road. Turns out many have found it in the form of buffer funds.
It basically exposes you to the stock market going up or down, but to a lesser degree than if you just only owned stocks.
So how do buffer funds work? And what are the risks of investing in them?
We'll ask our markets reporter Eric Wallerstein about it after the break. ReliaQuest fortifies your business with agentic defense, AI that detects, contains, and eliminates cyber threats in minutes. It helps your security team move faster at the work that matters most to protect the business now and delivers insights to help them predict what's next. ReliaQuest, agentic defense for the enterprise. Learn more at ReliaQuest.com. That's R-E-L-I-A-Q-U-E-S-T dot com.
Stocks have been flirting with bear market territory on and off this year, and many investors have struggled to find a haven for their money. But some are turning to a type of exchange-traded fund called a buffer fund that aims to give them a layer of protection against market volatility. So how do they work? And do they work? Let's bring in Wall Street Journal markets reporter Eric Wallerstein for some answers. Eric, thank you very much for being with us.
What are buffer funds and how do they differ from regular ETFs?
Yeah, I appreciate it, JR.
Good to be here. So Eric, boil this down to simple terms for us. What exactly is a buffer fund?
So a buffer fund is a really popular set of ETFs or exchange-traded funds that will guard an investor's losses from the stock market, but also limit some of their potential gains as well. They'll use an option strategy where they're going to mitigate against some of your losses if the market falls, but then they'll also sell some options to help buy that protection. When they're selling those options, they're going to cap your gains at a certain level. It basically exposes you to the stock market going up or down, but to a lesser degree than if you just only owned stocks.
Now, what are some examples of funds in this category and are they available to individual investors?
So the largest family of funds in the category is called the JP Morgan hedged equity strategies. Their first one actually became so big they closed it to new investors. But their two remaining funds are still open and that can be accessed via your investment advisor, your 401k plan or other means versus there's newcomers onto the scene called the buffer ETFs, which are a huge suite of exchange traded funds that investors can easily access through their investment advisor or a trading app. And so far, just in 2022, over six billion dollars has come into these funds.
Why are these types of funds become so popular?
A really big reason these funds have gained so much popularity is, you know, there's been a huge market route. We had a bear market in the first half of the year, and there really hasn't been much protection. Even in bonds, for instance, they fell almost as much as stocks earlier in the year. So investors have really been looking for other means of protecting their portfolios during a market decline. This is one of those avenues.
So what types of investors typically put money into these funds?
One of the types of investors who have really found these products attractive and put a lot of money into them is the nearing retirement or in retirement group of people.
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