The first buffer exchange-traded fund (ETF) that can cushion losses is set to be listed. While the buffer ETF could be an effective investment tool to mitigate some losses amid adjustments in the U.S. stock market, there are several considerations to take into account before trading. It should be noted that the buffer ETF does not guarantee a promised 'loss cushioning amount (buffer)' regardless of when it is purchased.
According to the financial investment industry on the 25th, Samsung Asset Management's 'Kodex U.S. S&P 500 Buffer March Active' ETF will enter the KOSPI market today. The ETF, which tracks the U.S. Standard & Poor's (S&P) 500 index, has a buffer of 10% and a cap of 16.4%.
Before investing in the buffer ETF, it is necessary to clarify the concepts of buffer and cap. The buffer represents the loss range that cushions from the benchmark. Kodex U.S. S&P 500 Buffer March Active is based on the S&P 500 index of 5650. Since the buffer is 10%, simply calculated, if the buffer does not fall below 5085, there will be no losses. Even if the S&P 500 index drops to 4800, a 15% decrease, the loss rate will be 5% (15% - buffer 10%).
Conversely, if the S&P 500 index rises by 10% to 6215, all the profits equivalent to the rising index that does not exceed the cap of the Kodex U.S. S&P 500 Buffer March Active will be enjoyed. However, even if the S&P 500 index rises above the cap (16.4%) to 6600, profits cannot exceed the cap. In simple terms, just as the bottom is blocked, the top is also limited.
Ultimately, this product is for safety-oriented investors who believe that the S&P 500 index could rise by as much as 16.4% by March 2026, while also noting that various adjustments might occur in between, increasing uncertainties.
The promised buffer of 10% and cap of 16.4% for the Kodex U.S. S&P 500 Buffer March Active is based on the outcome period (from the day the option position is established to the expiration date, which is one year). The revenue structure may vary depending on the outcome period. Additionally, it does not guarantee the buffer of 10% and cap of 16.4% at every trading point for each individual.
For example, if the S&P 500 index falls 10% below the benchmark of 5650 after the listing of the buffer ETF, buying the Kodex U.S. S&P 500 Buffer March Active would result in no remaining buffer and an increased cap of 26.4%. Conversely, if purchased when the S&P 500 index rises 10% above 5650, the remaining buffer would almost reach 20%, but the cap would decrease to 6.4%. This is why it is necessary to check the remaining buffer, cap, and outcome period provided daily before trading the Kodex U.S. S&P 500 Buffer March Active.
It should also be noted that the Kodex U.S. S&P 500 Buffer March Active is a foreign exchange-exposed product. The buffer and cap are based on the underlying asset, the S&P 500 index, and are separate from the exchange rate between the Korean won and U.S. dollar (won-dollar exchange rate). Even if the S&P 500 index falls only 10% below the benchmark, if the won-dollar exchange rate decreases, one could incur losses due to currency exchange losses.
Conversely, while the Kodex U.S. S&P 500 Buffer March Active cannot generate returns exceeding the cap based on the index, if the won-dollar exchange rate rises, additional profits can be expected. For reference, the average won-dollar exchange rate over the past three years (2022-2024) was 1320 won, but it currently exceeds 1460 won.
The buffer ETF is based on 'total revenue.' It reflects dividends and the total fees of the asset management company. Depending on the size of the settlement of account dividend that occurs once a year, there may be differences between the buffer, cap, and actual revenue structure. The composite total fee for the Kodex U.S. S&P 500 Buffer March Active is 0.39% per year.
The buffer ETF was launched in the U.S. in 2016, and as of last month, total assets under management (AUM) rapidly grew to 90 trillion won. This is due to many investors seeking to avoid losses each time economic uncertainty increases. It has gained popularity, especially among the safety-preferring baby boomer generation in the U.S., earning the nickname 'boomer candy.'
However, other domestic asset management companies are hesitant to launch buffer ETFs. The structure of the buffer ETF is complex, and there are concerns that investors may misinterpret it as a 'concept that compensates for losses.'
An official from an asset management company said, 'I don't think investors will intuitively understand the options strategy, which even our operators find hard to grasp,' adding, 'The buffer ETF has an expiration, so it ultimately is a method that compensates for losses on the expiration date. However, I don’t believe investors will fully understand and wait through the losses incurred along the way; therefore, we are only considering it for now.'