Broker Check
Understanding Buffered Products

Understanding Buffered Products

June 07, 2023

Buffered products provide a mechanism to arrive at a prearranged result on an investment, whereas traditional investments do not provide similar defined results. Buffered products provide protection from losses in exchange for placing a cap on the possible returns an investor can gain.

For example, if your buffered product is capped at 10%, and the market goes up 9%, you earn 9%. If the market goes up 20%, you would only earn 10%.

In exchange for capping your possible returns, buffers protect you against losses up to a certain amount. For example, if your buffer is set to -10%, and the market drops 10%, your product will absorb the entire loss. But any losses over that 10% buffer, you lose. So, if the market drops 20%, your product absorbs 10%, and you lose the remaining 10%.  Depending on the product type, buffers can typically exist in the range of 10 to 100%.

Options trading is at the heart of buffered products. A product sponsor has experts in options to create these products, so the average person can reap the benefits of clearly understanding the outcomes. This is done in such a way that when an investment product reaches the end of its lifecycle, you hit the buffer or maximum account value/return on the investment based on market performance.

There are different types of investors that can benefit from this investment model.

Young investors with a short-term financial goal can benefit since buffered products expire after a set amount of time. For conservative investors, buffered products can also deliver more predictable results with less risk since buffered products absorb a set percentage of the loss. The third type of investor that could benefit from buffered products is a seasoned investor. If you are well educated on exactly how buffered products work, you can use them to your advantage depending on your goals, the amount of time you have, and how much you are willing to risk.

The upside to buffered products is that there is a greater certainty on the outcome and more reliability in long term performance. Another factor to consider is that market volatility increases the caps for some buffers.

Each buffered product is different, so make sure to check the time range on each product you are considering. This investment strategy is offered via an array of products that include ETFs, Unit Investment Trusts, and Annuities.  It is important to note that buffered products have their rates renew on a periodic basis, at that time rates can change.  This can vary by product type and sponsor, so it’s important to take into consideration and review in detail before making any investment decisions.

Our key takeaway is that buffered products give definable projected outcomes for investors that want market protection and less risk.