AllianceBernstein has expanded its suite of innovative ‘Buffer’ ETFs with two new funds delivering exposure to US and developed ex-US equity markets with dynamic risk management features.
AllianceBernstein dynamically adjusts the ETFs’ buffer and cap levels in response to changing market conditions.
The AB Moderate Buffer ETF (BUFM US) and AB International Buffer ETF (BUFI US) are listed on Nasdaq, each with an expense ratio of 0.69%.
The funds utilize a type of quasi-defined outcome investment approach. Defined outcome strategies tailor potential investment outcomes by aligning protection and return levels to investor needs.
They typically offer a specific level of downside protection (a “Buffer”) over a specific time frame, with a corresponding cap on upside potential. The outcome profile is achieved through options-based strategies, where the cap level depends on prevailing market conditions at the outset.
Similarly, the new ETFs enact their strategies by investing in FLexible EXchange (FLEX) Options—customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation. BUFM utilizes FLEX Options that track the S&P 500, while BUFI employs FLEX Options linked to the MSCI EAFE.
However, while these new ETFs share similarities with defined outcome strategies, they operate somewhat differently by adopting a more flexible approach to buffer and cap management.
Unlike traditional defined outcome ETFs, which reset their buffer levels consistently at the start of each new outcome period, these ETFs feature a dynamic buffer that AllianceBernstein actively manages. The buffer may provide up to 10% downside protection but could be set lower in favor of a higher upside cap when AllianceBernstein anticipates bullish equity markets.
Additionally, the funds are not bound to their three-month outcome periods. AllianceBernstein retains the discretion to end an outcome period early and begin a new one. This flexibility allows the firm to lock in gains or adjust the buffer to better protect capital in response to market conditions.
Many of the considerations of defined outcome strategies still apply, however. First, the funds’ options-based portfolios may lead to lower beta compared to traditional index-tracking ETFs, potentially causing them to lag their reference indices during strong upward market trends.
Second, investors who purchase shares mid-way through an outcome period may experience different risk and return dynamics. For example, they might be immediately exposed to the downside in so far as the reference index has already appreciated since the outcome period’s start.
To enhance transparency, AllianceBernstein provides daily updates on key metrics for these ETFs, including the current buffer and cap levels, the remaining downside protection before the buffer, and the days left in the current outcome period.
These features make BUFM and BUFI a compelling option for investors seeking dynamically managed risk and return profiles tailored to evolving market conditions.
They complement the existing AB Conservative Buffer ETF (BUFC US) which is similar to BUFM in that it is tied to the performance of the S&P 500 but is more conservative with a maximum potential buffer of 15%.
Nelson Yu, Head of Equities at AllianceBernstein, commented: “We recognize the growing interest that strategies such as BUFI and BUFM can generate for investors who are looking for risk management tools. Our talented investment teams have a combined 26 years of experience researching, implementing and managing option strategies to advance our clients’ success.”