Robert Powell's Retirement Portfolio: Are you in the retirement ‘risk zone’? These investments might be able to protect you.

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Are you in the retirement risk zone — the five years before and after retirement?

If so, you’re more exposed to the negative effects of loss to a much greater degree than other investors, according to a report published by Milliman Financial Risk Management.

That’s because those in the risk zone are likely withdrawing money from their nest eggs during market corrections or, worse yet, bear markets. And this combination of portfolio withdrawals with market corrections can shorten a portfolio’s life by seven years or more, according to Milliman.

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According to Milliman and others, buffered or defined-outcome ETFs, a strategy that historically was only available through insurers and investment banks, can be used to manage and mitigate what’s called sequence-of-returns risk, as well as some other pesky retirement risks (inflation, longevity and volatility).

So, what the heck is a buffered or defined-outcome ETF?

“Buffer ETFs are funds that seek to provide investors with the upside of an asset’s returns (generally up to a capped percentage) while also providing downside protection on the first predetermined percentage of losses (for example, on the first 10% or 15%),” wrote Emily Doak, director of ETF Research at Charles Schwab Investment Advisory, in a recent report.

“Most of the buffer ETFs currently on the market have a one-year outcome period,” according to Doak. “Meaning that the caps and buffers (as stated) apply only to investors who purchase on the rebalance date and hold the ETF throughout the entire outcome period.”

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Of note, investors “who purchase after the rebalance date will receive different caps and buffers based on the performance of the referenced index between the rebalance date and when they purchased the fund,” wrote Doak.

And these funds have become quite popular recently. There are now 148 buffered ETFs representing $ 14.15 billion in assets under management, and the largest buffered ETF is the FT Cboe Vest Fund of Buffer ETF BUFR, -0.14%, according to

Reasons to consider buffered ETFs

According to Graham Day, vice president of product and research at Innovator Capital Management, Innovator introduced the first-ever buffered ETF in 2019, and investors are gravitating toward buffered ETFs because they offer known levels of risk-management to most portfolios’ core equity exposures.

“As rates have risen at a pace that has surprised most advisers and resulted in historic losses for many bond asset classes in Q1 and YTD, retirees have been rudely awakened to the reality that bonds are not providing the type of portfolio defense they have offered in past decades,” he said in an email. “With the Fed just beginning their rate hike cycle, investors are favoring equities over bonds but don’t want to be fully exposed to equity downside. They also want to know they have built-in risk management as opposed to hoping their risk management will work.”

Given that and other benefits, several experts said these buffered ETFs do have a place in a retiree’s or preretiree’s portfolio. “They’re useful tools,” said Dave Nadig, a financial futurist at VettaFi. “They do exactly what they say they’re going to do.”

Consider, for instance, Innovator’s June Series ETFs recently rebalanced, and that provided investors with fresh upside caps and downside buffers. According to Day, the Innovator U.S. Equity Power Buffer ETF – June PJUN, -0.41% offers investors upside potential of 14.3% with a built-in buffer of 15% over the next one year.

“We believe these ETFs can help provide stability for retirees because they both offer meaningful upside potential to equities should they recover, but at the same time provide the known downside buffer against SPY losses of 15%,” Day said in an email. “Should the market continue to sell off due to the myriad factors stressing equities currently and SPY return -18% over the outcome period—through May of 2023—an investor in PJUN over that entire period would be down -3% gross of fees.”

And that, Day said, “can be nice peace of mind for investors in the ‘retirement risk zone’ who can’t afford to make their money twice — and, extremely importantly, experiencing less loss and volatility has a behavioral benefit in that it can help a preretiree or retiree stay invested and participate in the eventual capital appreciation that comes with having exposure to stocks over time.”

Buffered ETFs can also help one manage longevity risk, the risk of outliving one’s assets.

Consider: A traditional 40% stocks/60% bonds portfolio, under current assumptions, may last around 25 years or more, according to Milliman Financial Risk Management. By contrast, allocating just 15% of one’s portfolio to buffered ETFs may increase your portfolio’s life well beyond a traditional 30-year planning horizon, according to Milliman Financial Risk Management.

Expensive and complicated to understand?

To be fair, buffered ETFs are not without their drawbacks. “My only ding on them is that they’re expensive and they’re complicated to explain or understand,” said Nadig.

According to, the average expense ratio for buffered ETFs is 0.81%. By contrast, expense ratios of index equity ETFs were 0.18% in 2020, according to the Investment Company Institute.

Prior to buffered ETFs becoming available, the only way to obtain this type of exposure was through structured products from insurers and investment banks, Day said. And those products are illiquid, expensive, and opaque, according to Barron’s report quoting Ben Johnson of Morningstar.

“The majority of our ETFs are priced at 79 basis points, which compared to alternative structures, i.e. insurers and investment banks, is quite cheap,” said Day. By contrast, fees for structured products are sometimes embedded and can be more than 2%, according to Johnson.  

What’s more, Day notes that there is a highly liquid secondary market, and there are no commissions or surrender fees with defined outcome ETFs.

As for being complicated, well, buffered ETFs use options to guarantee an investment outcome, according to For instance, Innovator’s Defined Outcome ETF is typically made up of three main layers of options: The first layer involves buying and selling one or four options positions—one or two calls and two puts at predetermined strikes to provide synthetic 1:1 exposure to the reference asset; the second layer, the downside buffer layer, incorporates a put spread; and the third layer, the upside cap layer, involves selling a call, which “finances” the downside buffer and creates the upside cap.

Others aren’t so sure. These strategies have significant promise and are worth considering as part of a portfolio, but calling them “defined outcome” is a little misleading, according to David Blanchett, managing director and head of retirement research for PGIM DC Solutions.

“I’m not necessarily a fan of the term ‘defined outcome,’ because the outcome really isn’t any more defined than investing in the general market,” he said. “It’s just the return distribution that’s been reshaped. While someone might say I’m being overly technical… what happens when/if an investor purchases a 10% buffer ETF and then loses 20% if the market goes down 30% over the term?”

“While buffer ETFs and floor ETFs both fall under the umbrella of risk management, there is certainly a distinction between knowing a strategy’s maximum loss from the amount of potential protection against the market or a reference asset’s loss,” Day said. “It is important to note that level of buffer is, in fact, certain or defined at the point an investor purchases shares, and, therefore, works to shape an investor’s outcome relative to the reference asset. The amount of upside is also known, as is the amount of time in the outcome period.”

Despite his criticism of the term defined outcome, Blanchett thinks “the general strategy these products/solutions use could be useful to get an investor to take on some market risk that he/she/they might not otherwise.”

There are some other “protected wealth strategies” that investors might consider in addition to buffered ETFs, Blanchett points out. These include registered index-linked annuities (RILA) and fixed index annuities (FIAs).

Read more about Blanchett’s take on protected wealth strategies: Defined Outcome ETFs Don’t Really Have Defined Outcomes; It’s Good to Have Options: The Potential Benefits of Allocating to Protected Wealth Strategies; It’s Good to Have Options, Part 1: Meet Registered Index-Linked Annuities (RILAs); It’s Good to Have Options Part 2: DIY vs ETF vs RILA; It’s Good to Have Options, Part 3: Buffers versus Floors; and It’s Good to Have Options, Part 4: Optimal Allocations.

Bottom line: In a world where retirees need to make their portfolios last a lifetime, any and all investments and products should be considered. But whether investments such as buffered ETFs, RILAs, or FIAs have a place in your portfolio can only be determined in the context of your personal facts and circumstances. And trying to determine what’s best for your portfolio will require more than a little due diligence.