If there’s one thing the markets taught us in 2022, it’s that low probability events, such as stocks and bonds both falling at least 20% at the same time, occasionally become the reality, suggests David Dierking, exchange-traded fund specialist and editor of TheStreet's ETF Focus.
The days of putting your money in a half dozen mega-cap growth names and beating the market appear to be over. Investors will need to be more strategic in how they deploy their capital in 2023 and, for the first time in a while, risk mitigation should be a primary consideration. You should be thinking about downside protection as much as upside potential.
With tight monetary conditions likely to last throughout most, if not all, of 2023 and global recessionary risks rising, I like the Innovator U.S. Equity Power Buffer ETF (PJAN) as a great option for managing portfolio risk and protecting against losses, while offering the opportunity to still capture returns should stocks rally.
The Innovator buffer ETFs hold a customized basket of FLEX options with varying strike prices and the same expiration date approximately one year in the future.
The ETFs are structured in a way that if they are held for the entire “outcome period” (one year in the case PJAN), it allows the fund a buffer against a predetermined level of downside in exchange for a cap on the index’s upside.
PJAN is tied to the S&P 500 and is designed to provide protection against the first 15% of losses experienced by the index over the outcome period.
One of the downsides of buffer ETFs in the past has been their relatively modest upside caps. In 2022, the cap for PJAN was about 9%. That’s not bad, but it does open up the possibility of leaving a lot of gains on the table if stocks have a good year.
That looks like it’ll change in 2023. The last three monthly Power Buffer ETFs from Innovator are offering caps between 18% and 20%, more than double the upside capture potential from a year ago.
Quite simply, buffer ETFs have become one of the best deals in the financial markets today and means investors can win the trade no matter what happens to the S&P 500 in 2023. If stocks fall, you’re protected against the first 15% of losses.
If stocks go up, you capture gains all the way up to what’s likely to be an 18% to 20% cap on gains. It’s an excellent option for risk-minded investors. PJAN may not be the sexiest pick for the coming year, but it may do the best job of offering investors what they need most.