Investors who are growing concerned about the U.S. presidential election could turn to a rapidly expanding part of the ETF market to ease their worries — and protect their money — against potential swings in stocks.
Guarding against event-driven volatility is one of the use cases of a breed of options-based funds that have gained popularity with investors since the Covid pandemic. These ETFs, often called "buffer funds," use options to give investors downside protection in exchange for giving up potential upside. JPMorgan said in a June report on the ETF industry that this category now has about $40 billion in assets under management.
The funds come with different time horizons, and new funds are launching or resetting every month, so there are several options for investors to buy now and protect themselves through the November election. "If you watched the debate [Thursday] night like everybody else and you're like oh my goodness what is our country doing, and you're not so sure how you feel about the election, you can buy the six-month," said Bruce Bond, CEO of Innovator Capital Management, one of the firms that pioneered this type of ETF. How they work These downside protection ETFs are created using flex options to combine different derivatives contracts on a market index, like the S & P 500.
One way to structure these funds is to essentially buy a deep-in-the-money call option, allowing the trade to capture the upside of the market, and then create a so-called put sp.