Bloomberg Bashes Buffers

Nir Kaissar wrote an article at Bloomberg titled Buffer ETFs Are Insurance You're Better Off Without. His general argument echoed the one made by AQR in 2025 which generally says you'd be better off just lowering your equity exposure. Eric Crittenden from StandPoint has made the point that they turn the risk/reward upside down, there is more potential risk than reward. Plain vanilla buffer funds cap the upside and then protect against the first X% down like maybe the first 9% down or the first 15% down. After that, investors are subject to whatever losses the underlying incurs in the period defined like maybe one year or one calendar quarter. If the stock market falls 30% in a year then a buffer fund that protects the first 9% down, would end up dropping 21%....essentially. 

Since then, there have been quite a few products that adjust or try to improve on that very general framework. I don't do a whole lot of work to study them because I believe the arguments are more right than they are wrong but I wouldn't dismiss buffer funds entirely. BALT is in my ownership universe for clients. 

First, I agree, don't count on them to ever deliver equity market returns. If there is some suite of them intended to capture the stock market's upside that I am missing, please leave a comment with some symbols. 

BUFR and BALT have both been around for a while. BUFR protects the first 10% down for one year. It owns a ladder of different buffer funds and the cap ranges from 13-17%. You can see from the chart that it has a bit of equity sensitivity. At its low in 2022, BUFR was down 13.52% versus 24% for SPY. It has compounded at 9.42% versus 12.26% for SPY with a vol level of 10.63% versus 17.30% for SPY. It's not better than SPY and it is not worse than SPY because it is not SPY it seeks a different outcome.

BALT protects the first 20% down and resets quarterly. The upside cap is also reset quarterly and is usually just above 2%. It uses the S&P 500 as a reference but it is not intended to function as an equity proxy. The symbol BALT is a play on bond-alternative. Copilot says that in the last 50 years there have only been three calendar quarters where the S&P 500 fell 20 or more percent; the 1987 crash, 2008 and the Covid Crash. In each instance the drop for the respective quarters was 20-23%.

You'd be better off reducing your equity exposure. 

I tried to create that effect here. Portfolio 2 tries to combine SPY and SHY to get the same growth rate as BUFR and Portfolio 4 combines the two to get the same result as BALT. The growth rates are close but Portfolio 2 is somewhat more volatile than BUFR and Portfolio 4 has twice the vol as BALT.

To get Portfolio 2 down to the same volatility has BUFR, the weighting to SPY would be 62% but the growth rate of Portfolio 2 would lag BUFR by 92 BPs annually. To get Portfolio 4 down to the same volatility as BALT, the weighting to SPY would be 16% but the growth rate of Portfolio 4 would lag BALT by 230 BPs annually. 

I don't use BUFR and don't plan on doing so, I personally wouldn't think of it as an equity proxy but maybe some folks might. BALT is definitely not an equity proxy. Both have risks and quirks that need to be understood and if necessary mitigated, but that is no different than any other non-equity thing you could possibly buy. 

What does some buffer fund you might be looking at reliably do? Is there a need or room in your portfolio for the result that this buffer fund you're looking at reliably gives? That would be the first question I would address. Then, how does it deliver this result? Is there a basis to believe it can continue to deliver that result that you have at least some interest in? Then, if you look under the hood and don't like the details, don't buy it. For me, BALT has a differentiated, fixed income-like return stream without taking interest rate risk and less volatility than many fixed income proxies. 

The return profile, combined with a volatility of 3.35% makes sense to me as a fixed income substitute. It is not equities, repeated for emphasis. Keep in mind that the weighting is small, 5-10% of the fixed income sleeve so pretty small. If something breaks, the impact on the portfolio would be minimal.

Kaissar also talked negatively about bond buffer ETFs. I didn't know there was such a thing. I'll just take a quick look at the Innovator 20+ Year Treasury Bond Buffer ETF (TBJL). The fund references TLT, protects the first 9% down and the upside cap for the year ending June 30 is 48%. Hedging bonds is cheaper than hedging equities. 

To even consider TBJL, you'd have to be ok with TLT-like exposure which I am not. TBJL seems to have done what it is supposed to. In a long, shallow downtrend for TLT, TBJL is down less. I threw TLTW which sells covered calls on TLT into the chart for a little more context. Anyone who understood TBJL and has been holding it is probably satisfied with the relative result. Part of Kaissar's argument against funds like TBJL is that there are no distributions. That's true, the fund owns an options combo, not 20+ year bonds. 

From the top down, long term bonds are just the wrong part of the market, full stop. So anything that references the wrong part of the market is a pass for me. Mark Baker says that when you're on the wrong train, every stop is the wrong stop. I think that applies to TLT, TBJL and TLTW. At some higher yield than we have today, I'd be interested in probably no further out than ten years. If there is ever a yield that adequately compensates for holding that long, I'd probably just rather have the simple yield.

One quick snippet. Calamos launched another autocallable ETF with symbol CAGE. The info page says the "weighted average coupon" is 29.16%. Meb Faber found this;

I don't know the story yet but on the surface, this is drifting into crazy high yielder territory.

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