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What's the Alternative? | Episode 33 | ETF Masterclass: Buffered ETFs 101 with Erik Ogard
41 Plays2 days ago
Join host Shana Orczyk Sissel, Founder & CEO of Banríon Capital Management, as she sits down with Erik Ogard, Founder of BufferLabs, for a deep dive into Buffer ETFs — what they are, how they work, and when they can make sense in a portfolio. Erik breaks down the options mechanics behind these products, explains the risks and opportunities, and shares how active management and better analytics can improve outcomes for advisors and investors.
Key takeaways:
- Buffer ETFs offer defined downside protection and capped upside but are more complex than marketing suggests. Know the mechanics before you invest.
- These products are built from options strategies (put spreads, call options); understanding the Greeks (Delta, Theta, Gamma) is critical to managing behavior over time.
- Performance can deviate before expiration; active monitoring and dynamic management can improve results versus static laddered approaches.
- Advisors must educate clients transparently about trade-offs and set realistic expectations to avoid misunderstood risk exposures.
Listen now to learn how BufferLabs approaches engineering and managing Buffer ETFs, and why complexity demands expertise.
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Transcript
Introduction to Buffered ETFs
00:00:00
Speaker
And so seeing a gap, I thought we'd fill it. You know, it's the classic, I see a problem, let's build a solution. And as I was coming up the curve on these, let's say, I would share with colleagues, friends that are investment experts in the field, derivative experts,
00:00:17
Speaker
here's what's going on in these buffered ETFs. And all of them would say, you have to be kidding me. Like they're doing what? And that kind of started me thinking I should build something because I think I can help.
00:00:32
Speaker
That's really the basis for this. And so it goes back to 2021. When I began working at WealthPlan Group in Omaha, they had a buffered ETF portfolio or a portfolio of buffered ETFs, several tickers from various month expirations.
00:00:51
Speaker
And they were treating it as a buy and hold. And what I came to understand is that buying and holding these isn't the best. I don't think of it as best practice. So I began more actively monitoring and trading them.
00:01:08
Speaker
And then I saw the investment results we were getting, which were, I'd call them appreciably better than buy and hold and appreciably better than if you just...
Welcome to 'What's the Alternative?'
00:01:30
Speaker
Hello everyone and welcome to What's the Alternative? The show where we dive deep into the nuances of alternative investments with the practitioners that manage them.
00:01:43
Speaker
I have had a lot of discussions in the past where we have touched on the idea of buffered ETFs. And anyone who follows me knows that I am not the biggest fan.
00:01:58
Speaker
Our previous episode with Corey Hofstein, we touched upon it a little bit. And at the end of that episode, Corey and I... had a little chat and said, wouldn't it be cool if I could get someone on the pod who was a buffered ETFs expert?
Eric Ogard on Buffer Labs and ETF Insights
00:02:15
Speaker
And I immediately thought to myself, who do i know that likes buffered ETFs? Like, who do I know? and I thought, I do know somebody. I know my old boss from Russell has been posting a lot on LinkedIn about buffered ETFs.
00:02:35
Speaker
Maybe I should go talk to him. And that led to me reaching out to Eric Ogard, my former boss at Russell Investments. He is the driving force behind Buffer Labs, which is a company that offers really good analytics and research on buffered ETFs, as well as manages and has an ETF product in the market related to buffered ETFs.
00:03:02
Speaker
He draws on his extensive experience as a portfolio manager and investment professional. But starting in late 2021, while managing a portfolio buffered ETFs, he saw that they could be really tricky for advisors. They're really complex. And given his career has been spent in senior investment roles, Eric thought maybe there was a clearer way to evaluate these products.
00:03:22
Speaker
And much to my surprise, Eric turned out not to be the cheerleader for buffered ETFs that I thought. His views are actually much more nuanced and important.
00:03:34
Speaker
And he's going to give us a masterclass on buffered ETFs today and hopefully even school me. So without further ado, I'd like to welcome Eric Ogart to the pod. Thank you for coming.
00:03:48
Speaker
Thank you, Shane. It's a real pleasure to be here. It's been a very long time. In fact, I even mentioned when i reached out to her, was like, i feel like it's been almost 20 years since we've had like a real conversation. And it has.
00:04:01
Speaker
But we had another former Russell colleague on the pod a little while ago, John Lidington. So I feel like this is just a Russell reunion this last few months. 2026 has turned out to be a Russell reunion. So why don't we just dive right in Tell us a little bit what prompted your desire to go all in on educating and providing research for advisors on buffered ETFs.
Educating on Buffered ETFs' Complexity
00:04:28
Speaker
Yeah, I think that the greatest impetus is that I think, I just felt like there was a lack of understanding for how the instruments behave. And if you're going to invest in them analytically, what they require.
00:04:40
Speaker
And so seeing a gap, I thought we'd fill it. You know, it's the classic, I see a problem, let's build a solution. And as I was coming up the curve on these, let's say,
00:04:52
Speaker
I would share with colleagues, friends that are investment experts in the field, derivative experts, here's what's going on in these buffered ETFs. And all of them would say, you have to be kidding me. you Like, they're doing what? And that kind of started me thinking, I should build something because I think I can help.
00:05:12
Speaker
That's really the basis for this. And so it goes back to 2021. When I began working at Wealth Plan Group in Omaha, they had a buffered ETF portfolio or a portfolio of buffered ETFs, several tickers from various month expirations.
00:05:31
Speaker
And they were treating it as a buy and hold. And what I came to understand is that buying and holding these isn't the best. I don't think of it as best practice. So I began more actively monitoring and trading them.
00:05:48
Speaker
And then I saw the investment results we were getting, which were, I'd call them appreciably better than buy and hold and appreciably better than if you just had a ladder.
Market Traction of Buffered Notes
00:06:04
Speaker
So the thinking is, gosh, if I can do this as a newcomer, there's probably enough here in terms of distance return gaps and things for a more informed view to add substantial value in the industry.
00:06:20
Speaker
And so that's really Genesis. Yeah, it's funny because in 2009, my favorite grad school professor was a gentleman named Dr. David Simon. May he rest in peace. He was a derivatives expert. And at that time, structured notes were all the right, and I hated them with every fiber of my being.
00:06:40
Speaker
And the REA I worked for at the time loved them. And it took a lot for me to argue against why we should not be putting our clients in these structured products. I would do interviews with a niche publication called Structured Notes Daily. And the reporter would bring me the latest offering in the structured notes and they would get crazier and crazier. And I feel like that's been happening in Buffered Notes. I think most people have by this time, see the rant I went on when Calamos introduced.
00:07:12
Speaker
Their Bitcoin buffer, which I just was, it was a 0% downside with a 10% cap, which I guess today looks amazing. But also, why?
00:07:24
Speaker
i mean, that's not why you would own Bitcoin. And I just felt like the whole trend in buffered ETFs needs an expert like you to come on and just talk about it. So let's start with how they
Mechanics of Buffered ETFs
00:07:40
Speaker
work.
00:07:40
Speaker
I just touched upon structured notes. That's the influence on buffered notes and what led to their development. But talk to us about the history of buffered notes and in essence, the basics of what they are, how they're built, and some of the main things that just right off the bat, you need to be aware of.
00:08:01
Speaker
Yeah, so they were they were introduced in late 2018 and commercially began to be adopted in about 2019. And since that time, I think they've grown to like over 80 billion AUM.
00:08:13
Speaker
So it's there's been, after a period of testing, I think, fairly rapid adoption by the industry. And so you ask yourself, well, why did that happen?
00:08:26
Speaker
And I think of it as an investor utility. Like they're doing something that people want or they perceive that they want. And so they've got market traction because some people can't stomach equity market risk.
00:08:41
Speaker
But They need, or I should say unhedged equity market risk, but they need some exposure to capital appreciation. So they do it and they're uncomfortable. And the degree of discomfort with equity exposure varies from person to person.
00:08:55
Speaker
So it's a classic u investor utility problem. But we know they're scratching an itch of some kind in the marketplace. And the basic structure is exposure to an underlying market,
00:09:09
Speaker
That exposure is achieved with a deep in the money long call option on the underlying, which pretty much provides one-to-one exposure to the underlying index, let's say the S&P.
00:09:23
Speaker
Now, the idea is people want some protection, so how do they achieve that? They achieve that through a structure called a put spread collar. And a collar implies you're on both sides of the current price of the market.
00:09:37
Speaker
And so there are two pieces to this, put spread, involves buying a put at some level below the current market. And the different issuers have different parameters for how far below they set those.
00:09:51
Speaker
And then there is a buffer zone where the put is effective until the endpoint at which the provider sells a put.
00:10:02
Speaker
So they buy a put here, sell a put here, create a buffer. That means they have exposure market declines that are beyond the end of the buffer. Now that's the downside part.
Understanding Daily Behavior of Buffered ETFs
00:10:15
Speaker
To pay for that, to pay for that options package, selling the put covers some, right? That's where they get the income, but they have to also sell a call that caps the return to the buffer strategy.
00:10:29
Speaker
And so those caps vary in size. that I think there are a few, so that's the basic structure, a put spread caller. So selling a call above, buying a put, selling a put with some that creates a buffer.
00:10:44
Speaker
So is that part clear? Do you think- Yeah, but isn't there also some element of zero coupons involved here? In some cases, I know that's definitely the case in structured notes.
00:10:56
Speaker
It depends on the provider. Are you saying exposure to a zero coupon bond? yeah Usually the zero coupon bond there to provide a guarantee, some level of, we know at the end we'll have this money left to meet those buffers, as you you explained with the caller, but also because a lot of them have a guarantee, at least in structured notes, sometimes there's a guaranteed outcome, like you'll never return less than x or something of that nature. Sometimes they include a zero coupon, knowing that- There are those types of developments out there, but the vast majority of the ones that are equity market oriented are simply the structure I laid out for you. There are always nuances. There's a proliferation. As you know, there are literally hundreds of these tickers out there now.
00:11:45
Speaker
who This is how the industry- presents and talks about these buffer structures. Now, they so they talk about the payoff as if that is certain.
00:11:58
Speaker
The interesting thing is it's only certain on the expiration day. yes And so what our research and analysis shows, and we have this really cool chart that shows the theoretical option payoff And then it shows the package of options payoff curve today.
00:12:16
Speaker
And there's a dramatically different curve in the existing options package before expiration than there is on that last day.
00:12:27
Speaker
And so this is why practitioners talk about you have to buy it at the offering and hold it all the way to the reset and never sell it. Right.
00:12:37
Speaker
And We understand in order to talk about as an outcome, a structured outcome, you have to talk about them that way. But if it's only true on the last day, and these are daily liquid instruments that trade in the marketplace every day, our view is shouldn't you be talking about how they behave today, not how they will behave 200 days from now?
Options Concepts and Their Impact
00:13:02
Speaker
So a lot of our analytical approach is to bust these instruments open and graphically map the existing options package price today and show how it behaves over time relative to that approaching expiration date.
00:13:21
Speaker
Yeah, so I think now we're gonna get into some weeds here that the audience is probably gonna need some handholding through because we're about to get complicated. And one of the things that everybody hears whenever we talk about options, especially when you talk to derivative experts, is all of a sudden they start talking about the Greeks.
00:13:39
Speaker
And so to your to your point, when you start talking about the real-time option curves associated with the underlying options in these buffer ETFs, you can't do it without talking about the Greeks.
00:13:53
Speaker
So let's handhold our audience through... some basics of what the Greeks are, because it's really imperative to understand some of that. And we don't have to go all the way down the rabbit hole. We're not expecting people to leave this podcast being and feeling like derivative experts.
00:14:09
Speaker
But I do think that it's important to have some basic understanding so you can ask the right questions when you're evaluating these things. Yes. When we talk about the Greeks, they're the so-called major Greeks and they're the minor Greeks.
00:14:24
Speaker
We're not even going to talk about the minor Greeks. That's just a level of detail that nobody wants. So let's talk about the most important ones. Mm-hmm. And the most important ones for options pricing are delta, and that's the price movement of the options package relative to the price movement of the underlying asset.
00:14:49
Speaker
okay So the delta movement in these instruments, in these buffered ETFs matters a lot. That's a big one. The second big one is theta, which is just time to expiration.
00:15:01
Speaker
And so in options pricing theory, that time has value to it and it can influence the price of the options package, especially as one approaches the expiration date.
00:15:13
Speaker
The theta impact on the pricing of what you hold can become meaningful at times. And then there's volatility, of course, which is used to price the options and when market volatility is higher.
00:15:26
Speaker
the options package costs more. And I'd say Rho is somewhat interested interesting and Gamma is the second derivative of Delta. So it's how responsive is the package to changes in the market and what's happening to Delta dynamically.
00:15:44
Speaker
So all of these things conspire to have an impact on the NAV of these buffered ETFs that people hold and my presumption is that probably no retail investor or a very limited number actually understand the way Greeks impact the pricing of their portfolio.
Active Management of Buffered ETFs
00:16:11
Speaker
And i even submit the advisors that sell them probably don't understand them to the level that they need to. And that's why we created the re so we started providing research over a year ago, because we wanted to peel back the layers and help people see what was actually going on in these portfolios and what made one good and what made one bad to help people sift through and become more informed and educated about what they own.
00:16:40
Speaker
So, yeah, there's the short Greeks lesson. So I want to just rewind and just remind our audience that the reason it's called the Greeks is because it's everything's referred to in reference to the Greek alphabet.
00:16:52
Speaker
so Gamma, theta, rho, delta, those are letters in the Greek alphabet. So that's why we call them the Greeks. So that is just a good reminder in your mind. That's why we refer to everything as the Greeks because a lot of these complex aspects of, it's not even really markets.
00:17:14
Speaker
it ah It's all really calculus. but These are all, if you've ever taken a calculus class, This is just math. These are the same reference value names that complex math he uses. So that's why we call it the Greeks.
00:17:29
Speaker
So let's start now with, if you're sitting with an advisor and they either currently use buffered e ETFs or contemplating using buffered ETFs, where do we start?
00:17:42
Speaker
What are the things that they need to absolutely know about because it's gonna affect the client experience? Yeah, I think so. Let's say you own one of these. And let's say you bought it at the on the reset date.
00:17:58
Speaker
And let's say you're six months in. And then let's say the market's been really moving aggressively and you've hit your cap. It's six months.
00:18:09
Speaker
So in this thought experiment, if you're sitting on something that has no upside and only downside in it until the protection kicks in, why would you own that? Why would you continue to hold something that has no upside and has a large downside? So that skewed relationship to the downside with no return.
00:18:32
Speaker
Like, why would you do that when you could sell it? It's daily liquid. You could just go to the market and sell it. and buy money market fund. That would in six months give you some certain return with no downside and no risk. So the way they're structured to have that defined outcome period is a strength, but it's also a weakness.
00:18:55
Speaker
And market path, what we have learned in observing these and watching their behavior is that no one knows the market path in advance, but when the market takes a path,
00:19:07
Speaker
It affects all of these instruments differently. And so you have to be paying attention, if you own these, to the path the market is taking and the specific payoff structures that are embedded in the options package of the instrument you own.
00:19:26
Speaker
Yeah, and I think that's important because when we did our call before, when I was trying to convince you to come on the pod, because you had some reservations in in the beginning, but it turns out we were on the same page. You talked about that. And I think that's something I always talk about, which is that once you hit that cap,
00:19:45
Speaker
all that upside, you're not protected. That's not part of your protection. Like if the market goes up 20, your cap is 10 and then comes down 15, like you haven't, like your downside protection hasn't kicked in yet.
00:20:01
Speaker
Even though it's down 15, if your downside is maybe 10%, right? Cause it's not actually down 15 from the defined outcome. And I think a lot of people miss that. And to your point, those things impact the underlying value of the buffer itself.
00:20:18
Speaker
And maybe that's a good segue into how these things trade. We know what the defined outcome is. And I talk about this all the time with advisors, but in the middle, ah Everything that's happening with the price of that security is based on the market movements of the securities that it holds.
00:20:36
Speaker
So for a client, that can be unnerving because it might not feel... like the defined outcome that they bought it for, and that can cause them to ask and push back and have questions.
00:20:52
Speaker
So let's talk about that. Let's talk about, we know what the defined outcome is. We know the issue a date and we know the expiration date. And we know that if we buy on the issue date and hold to expiration, what our defined outcome is.
00:21:07
Speaker
But in between, which is the beauty of what you do and what you talk about, That's really the opportunity that no one talks about. And to be fair, most advisors aren't equipped to monitor them and trade them in a way to gain the arbitrage opportunity here. But let's talk about that because that's what brought you to this place was that you noticed it and you did because you could manage it.
00:21:36
Speaker
So let's talk about that. Yeah, so I think I did a blog post on this earlier. It's on our website, and it was titled something like, it's been over a year ago now, but it was something like, the market went down, but my buffered ETF went down.
00:21:52
Speaker
What happened? I thought I was hedged. So that experience for the individual client who bought one of those, thinking that they had this very predefined linear protection,
00:22:05
Speaker
That's not the reality until the very last day. So what's going on in the interim? It's this dynamic where from time to time, you can get something that goes down when it's in its buffer zone and you thought it wouldn't go down at all. Like, why did I lose money? I thought I was hedged. And so there's a huge need for education on them with certainty.
00:22:25
Speaker
And I don't think it makes these bad de facto. It just means they need to be monitored and managed. And so if you get one of these and you're having that difficult client experience where they're saying, why is it behaving this way? I didn't think I bought something like this. That creates a challenge.
Buffer Labs' Performance and Strategy
00:22:43
Speaker
It's into that confusion that we wanted to interject ourselves in the conversation.
00:22:48
Speaker
We did a number of things that were just kind of cool to prove that we had some insights. For example, we took a test account and within one single laddered, equity buffered equity structure, we can get into the ladders and what they do when and Yeah, you have some cool charts, so I'm looking forward to that. We had a test account where we traded only from among the 12 tickers inside of a ladder.
00:23:12
Speaker
And we appreciably outperformed the ladder by just avoiding the things that were obviously impaired for some reason or another. They were capped out.
00:23:24
Speaker
They just didn't have the upside anymore. so you ignore those and you buy the ones that give you the better downside upside trade-off. Mm-hmm. And just with that ah experiment trading from only a few inside of an offering of 12, we added huge value.
00:23:41
Speaker
And that's when we really knew, okay, we're onto something here. and And it's what led to all of the analysis that ultimately resulted in us launching our own ticker to correct for what we think of as the engineering flaws inside buffers as a class.
00:23:59
Speaker
And i use the word flaw And it doesn't mean they're terrible. So i we've we've got some cool charts talking about what are the laddered strategies doing for investors? why would they What's so attractive about these? And I think the big takeaway from the 2022 period to 2023, you got significantly less market downside exposure in 2022.
00:24:28
Speaker
and pretty good upside participation in 2023 from the ladders, ignoring the individual ETF structure for a minute and going to laddered ETF, which includes 12 of the underlying tickers, one for every month,
00:24:43
Speaker
Those handled that particular market path. And I always talk about path because path matters. If you look at how these things handled the taper tantrum last spring, it wasn't as good. It wasn't, you know, we had more of an orderly sell off in 2022.
00:24:59
Speaker
as compared to that 2025 event. So path matters. But in that particular case, there was a test case where most investors got exactly what they wanted, limited downside participation and pretty good upside participation.
00:25:16
Speaker
So I think that event kind of led to the industry being able to grow assets very dramatically. But it doesn't eliminate the problems with these instruments or the need to actively monitor and manage. So the safe solution is by ladder if you're gonna stick with those traditional buffered ETFs.
00:25:39
Speaker
And it just might annoy some people that a third of them are materially impaired if you're investing in that and you just take it anyway.
Critique of Rigid ETF Structures
00:25:47
Speaker
We wanted to engineer solutions that kind of got rid of all the major design flaws.
00:25:53
Speaker
So that's what we did. So a lot of advisors don't ladder them or their buffers at their core are derivatives and When you think about other derivatives that are out there, futures and the like, you have to roll them. It's kind of a requirement, so you have to paying close attention. to your point, sometimes it makes sense to start to roll and make decisions on whether or not to keep the position before the expiration date.
00:26:23
Speaker
Volatility matters, as you alluded to earlier. Options are inherently, the price of options are inherently influenced by market volatility as a whole. In fact, they are in many ways volatility instruments, right? They tend, their prices tend to really spike when volatility is high. Low vol markets are not good for derivatives if you're trading them actively and not using them as some sort of hedge or buffer, if you will. So let's talk about
00:26:57
Speaker
what a ladder is. You did mention that you would have one for every month. But when you're building your ladders, because as you said, you felt so strongly about this.
00:27:10
Speaker
You launched your firm with the goal of providing education, research, analytics, that kind of thing. And then ultimately realized that the vast majority of users of these products are not Maybe they could do it if they really wanted to, but it's a full-time job in and of itself. You can't do it on the side. It's not like a mutual fund or an ETF where if you don't touch it for a couple of days, it's not the end of the world. Some of these things are highly sensitive to daily movements. The fact that they have...
00:27:43
Speaker
expiration dates that are often nine, six, nine, 12 months suggest that they have greater time sensitivity to something that you're going to hold for the long term. So let's talk about how that approach happened. You started, you said, working with a firm that had these and you started managing them.
00:28:03
Speaker
And as you've gone through the learning curve, How do you approach building ladders? What are the key attributes you look for? and how do you manage day to day the training? What are the things you look for?
00:28:15
Speaker
so what I would say is a ladder is one solution to the engineering flaws of holding a single month Buffered ETF. Okay. Our solution is not a ladder.
00:28:26
Speaker
It's what we would call a rifle shot. But let's talk about the design flaws. Okay. that are embedded in a single month expiration Buffer DTF.
00:28:41
Speaker
And these things are by prospectus. So they're designed for and a buy and hold single day outcome at the end of a year. Okay. So implicit in that is they're going to rebalance their option package in a predetermined way on one day a year.
00:28:59
Speaker
And there are 252 trading days in a year. So they're literally arbitrarily choosing one day out of a potential of 252
00:29:09
Speaker
to rebalance that options package. And markets are dynamic, they're messy, lots happens. And so our view is, how many degrees of freedom are you giving up by limiting your fund to one day?
00:29:24
Speaker
So when we designed ours, we said, well, we'd kind of like to be able to rebalance on any day. So we have 252 choices when a typical buffered ETF has one on rebalance day.
00:29:37
Speaker
So in our view, that's a huge design improvement. Mm-hmm. Now, on top of this, when a buffered ETF is launched, the prospectus states the downside protection will start, you know, 5% below the market or something like that. So it doesn't start immediately.
00:29:58
Speaker
We said, no, we should be able to start the protection at zero right under the market if we want to, to minus five. We're going to have a range where we can start protections.
00:30:10
Speaker
Now, the ah the other thing these things do is they're very explicit about the size of the buffer zone. They'll specify 10% or 12% or 15%. Sometimes they're very, very deep buffers.
00:30:24
Speaker
We've said we can range that from as small as five, the buffer is five in size, all the way 15%. two fifteen So we can start at zero to minus five, and we can go from minus five to 10, all the way to minus 20.
00:30:42
Speaker
That's in our prospectus. So if you think of that buffer zone as being another form of degrees of freedom, by prospectus, these offerings have limited degrees of freedom, and we've tried to expand, we've tried to create maximum degrees of freedom.
00:31:00
Speaker
On top of that, Instead of saying that we're going to have a 12-month outcome period and come hell or high water, we're holding for 12 months.
00:31:11
Speaker
We've actually said, no, we want to be able to buy our options package at a tenner of between four and nine months. And we want to have the ability to move that around.
00:31:23
Speaker
And then finally, most of these have by prospectus a cost neutral cap, meaning that only the revenue they get from selling the put can they use to cover the costs of the package.
00:31:41
Speaker
And so they end up getting a, they're, they're a price taker on cap. So at the time they recast their, when they rebalance on that single day, if volatility is really high and the price of the call That'll affect the cap that they set on their buffer.
00:32:00
Speaker
So the, on the ETF package, so they can end up with very limited upside if the rebalancing day was a bad one. And I call this like a, you know, you can have a good grape crop or a bad grape crop and that determines if the wine's any good that year. yo That's the same thing with these buffered ETFs. If they rebalance on a bad month, that thing's going to be impaired.
00:32:24
Speaker
for a long time. And I think the interesting data that comes out on these, and we have Charged showing this, there are two instruments from both inside the same laddered structure, one month apart, with a 12 month return difference over 12% return difference return difference over a 12 month period because they were reset one month apart.
00:32:49
Speaker
Now there's zero skill and that just happens to be the effect of path and the rebalancing. So if you thought to yourself, these are identical, the buffer is identical, but one is 12% better than the other and it's not skills-based.
00:33:05
Speaker
What kind of randomness are you exposing your clients to if you're just choosing one of these things? just because that happened to be the day that you wanted to look at buffers. I think you also bring up something that I really criticize our industry on is we have this desire. And unfortunately, the desire is matched by a demand for this from the investors who use these products to simplify things that aren't simple.
00:33:40
Speaker
And what you're really pointing out is there's a lot of that happening with buffers, right? Like you have your cap and your defined outcome and all the stuff you're talking about, the degrees of freedom, the reason there aren't so many degrees of freedom is because that brings in complexity to conversations that make these things inherently more difficult to talk about.
00:34:09
Speaker
And I think that's where a firm like yours can be really useful. And this podcast can be really useful in terms of trying to help people understand that simple isn't always best, especially when working in complex products. And alternatives is my world.
00:34:26
Speaker
That's why I started my firm, because much like you kind of narrowed in on the buffer I etf need for education, understanding, and to bring to light that complex cannot be simplified without...
Complex Financial Products Simplification
00:34:40
Speaker
really giving up something important. And i think that's that's what led me to launch my own firm is that there's value to these products. And much like in our first conversation, we were like, no I don't hate them. You and I actually see eye to eye. i actually really like them because I actually think there's an arbitrage opportunity here for people who are willing to embrace the complexity.
00:35:08
Speaker
And that's very much how I feel about alt in general, is that- Yes. like Yes, they're complicated. I can help you with that. I can't overly simplify a complex instrument though.
00:35:22
Speaker
And so we wanna find ways to be able to discuss it so that we can set appropriate expectations with the end client without unnecessarily confusing them. And in essence, I think that's what makes what you talk about and what you're doing actually better. It's inherently more complicated.
00:35:41
Speaker
But it's actually easier to understand and communicate the expectations to the end client along the way because then all of the movements that happen on the day-to-day not red flags to them, right? I just really feel like the need to oversimplify a complex instrument actually leads to more questions, not less.
00:36:03
Speaker
And if you just embrace the complexity, you can actually better communicate and set expectations. And I think that's what you're doing. That's right. That's exactly what we're doing. That was our goal to assist in better understanding. And now the thing is though, and I always like to go back to this. If you just ask, what have these things accomplished for people?
00:36:26
Speaker
And you look at say the last five years and you look at a scatter plot of the buffered ETF against an S and P 500 index. you'll see that the buffered ETF kind of produced a return of nine with a vol of nine while that's for a ladder over the last five years. And the S and P produced like 14% annualized return with a 16 ball. so,
00:36:53
Speaker
and so That's actually a really, really strong equity environment in spite of what people may think of the past five years. And that trade-off is pretty good. 14 return for 16 vol.
00:37:07
Speaker
The long-term averages on the market are kind of like 10 with 16 ball, 10 with 17 ball. So the sharp is something lower than what has been experienced in this recent period.
00:37:21
Speaker
But then if you go back to the long term on the stock market and you say you're going to basically get a 10% gross of fee return, generalizing, that's probably a pretty fair representation.
00:37:33
Speaker
I can remember George Russell saying that on Louis Rukeyser's Wall Street Week in the 90s. He said, ah that's about 10%, give or take. You can speak in those large spans of time casually when you're a renowned business person who's made it in the finance business. But um You know, if it's 10 and 17 vol on an unhedged equity portfolio and you can get seven and eight vol or seven and nine vol, that's a pretty good trade-off for most investors. And that's why I think the buffered ETF structure is here to stay.
00:38:11
Speaker
And our only question is, can we come in and engineer a solution that improves on the ladder and gives people more of what they want? That's really what we're trying to do.
00:38:22
Speaker
So let's talk about that. um Yeah. Yeah, it's funny. when you When you talk about 10% average return with a 16% vol, there's literally an entire generation that's been in the business for almost two decades now that has no idea that that's true because that has not been the case since...
00:38:42
Speaker
two Since the bottom of 2009. But for real, that's those numbers, long term, historically, are spot on. We just have a generation that will say that can't be true. It is true.
00:38:57
Speaker
That said, let's talk about what you're doing. You sent over quite a few charts and I'd love to kind of walk through those and what you're doing and how you're able to game the system, if you will, because I think it's really interesting and, uh,
00:39:16
Speaker
We'll start with compliance past performance. There's guarantee of future results, but I think it's really interesting because there's a tremendous arbitrage opportunity for someone willing to do what you do.
Engineering for Optimized ETF Performance
00:39:28
Speaker
And most people can't, so they should look at Buffer or Labs as a way to really get the benefit of these products, but in the most optimized way.
00:39:40
Speaker
Yeah, so again... We're engineers, we're empiricists, we're data scientists. We're not trying to forecast the market direction and we're not trying to position our fund to take advantage of a superior forecast.
00:39:55
Speaker
We are not finding mispricings and options and trying to trade them in a hyper velocity kind of way to make money.
00:40:06
Speaker
We are just saying de facto, When there is a gap inside of the instruments in a ladder that all have the same buffer zone and there's no skill, if there's a 12% return top to bottom gap over a 12 month period,
00:40:26
Speaker
there are ways to understand what's driving that gap and to not impute the gap, the downside experience, the worst of those ladders, the worst of the holdings in the ladders. There's a way to avoid that with superior engineering.
00:40:43
Speaker
And We don't know the market path. And so certain market paths treat different strategies better or worse, and you really can't know those things in advance.
00:40:54
Speaker
So our thinking is, hey, look, if buffers get capped out, let's make sure we can reset so we're not capped out. If the downside is too far below our current position, let's make sure we can re recast the options package to bring that stop loss up a little more tight under our current position. yeah And let's do so with systematic rules and design features that compel us to rebalance when certain things take place. And so if you think, all right,
00:41:28
Speaker
Most of the providers are specifying the buffer zone. hello They're managing to that. They're managing to a 12-month holding period. They're managing to a structured outcome.
00:41:42
Speaker
If such and such happens, we can tell you with certainty on the last day, your return will be this. We're abandoning that. And we're saying, no, we're actually going to manage not to the buffer, but we're going to manage to the Greeks.
00:41:56
Speaker
So it's a design and engineering thing where we've just said, by actually managing designing and managing on the things that matter to the pricing of the instruments we hold, we will have a better experience on capturing more of that upside and at least equaling the downside protection you get from an unmanaged ladder.
00:42:21
Speaker
So let's talk about it. You sent me some slides and it's titled making the case for the buffers. and In these slides, which going put up on the screen, you show a number of different combinations of buffers over time, 22, 23, and then over time from...
00:42:42
Speaker
22 to today of how the S&P is done versus some of these laddered buffered products, which are different than the buffers themselves because they're doing what you're talking about. And i think maybe this is a good time to think about, okay, let's start with that.
00:43:00
Speaker
What's the case for buffers? Why you want to own it? And let's look at one of these time periods you sent over. Yeah, so let's just take 2022, for example. okay In that year, and let's just look at the ladders.
00:43:13
Speaker
What are the ladders doing in 2022? you know, they're down and these buffer instruments differ by the magnitude of downside protection they impute.
00:43:24
Speaker
So some are deep, some are what they call conservative. are different words to describe how large the buffer is below the equity price, the current equity price.
00:43:35
Speaker
And so you can see that in that down market at the margin, the deeper buffers protected more of the downside than the more moderate buffers.
00:43:46
Speaker
But all of them as a class kind of provided materially less participation in the market sell-off. So that's a good thing. The question is how much is that protection costing you in an up market? Right. So then you turn attention to 2023 and you look at those same laddered ETFs and what percentage of the upside they gave you terms participation.
00:44:15
Speaker
And no surprise, the more moderate downside protection strategies gave more upward lift or more upside amplitude than the more protective ones.
00:44:27
Speaker
And they all did participate. So but we looked at that and we thought to ourselves, what do markets do over the longterm? And academics call it a random walk around an upward drift. right So they're random, but there's a drift to it. There's an upside bias.
00:44:47
Speaker
These are a loaded dice in the favor of the investor. So if that's true, and we wanna provide downside protection, shouldn't we be trying to maximize our exposure to the upward drift embedded in the random walk?
00:45:05
Speaker
So we wanna make sure that as markets go up, we're not giving up too much of the upside. So that's a design principle embedded in our approach to do as well in downside and do better in upside markets.
00:45:28
Speaker
Because really, there's nothing worse than having a risk exposure that goes unrewarded. And our thinking is through those design features I talked about earlier, that we will be giving our investors exposure more exposure to upward drift than if they went with a ladder.
00:45:47
Speaker
And in particular, if they went with a single month buffered ETF. Those things in an upward market are going to get capped out. And the give up is on the upside actually.
00:46:00
Speaker
So one of the other charts you gave were basically a ladder every month of a set of buffers for the last roughly roughly year.
00:46:11
Speaker
And you can see the price change. Now, what I don't have here for context is the caps on these. So I can see, generally speaking, what the performance is. And what stands out to me, for example, is March and April were obviously not great months, just based on March, April, and June are the outliers in performance.
00:46:31
Speaker
By far. On the downside. On the, just the overall return. So I don't know what the caps are, right? So I don't know if the cap on these things is 10% or whatever, but I also see the vast majority of these on the other months are around 13%, right?
00:46:47
Speaker
If the cap's 10, you would want to be selling these right now, right? If the cap is 10 and they're up 13, you want out of there. That's correct.
00:46:57
Speaker
Now, because you can actually capture the 13 today versus if you hold till expiration. Is that correct? Yes. Now, the problem is that creates a tax event yeah for investors if it's a taxable account.
00:47:11
Speaker
And that's another thing we were engineering for is that all of the rebalancing we're doing inside of our ticker does not result in taxes. So we're able to capture that upside and reset our options package without sending clients a taxable distribution, which is huge.
00:47:32
Speaker
Yeah, so let's talk about it though. Like when you look at these opportunities over time and you're building out, what's your alpha mechanism? What are you doing to capture some of this? And then how does that kind of play out over time?
00:47:48
Speaker
Okay, so let's just imagine, like we have some data in there that shows a July reset versus to an ah an August reset. July did not have a volatility spike and August did.
00:48:01
Speaker
So that August instrument is like that bad grape year for wine. They're rebalancing in a high VIX environment, which means they're going to get a much smaller cap.
00:48:13
Speaker
They're going to be impaired for a year because they had to buy a lower cap. They had to impute a cost on the cap that brought it way down. And so we're looking at that saying you should never buy or hold something that had a bad rebalance day, just owing to market features. That's not saying this is an unskilled outcome.
00:48:43
Speaker
This is saying this is a design flaw outcome. And so let's not have that design flaw. Let's not have our rebalance subject to one day a year. Let's open it wide so we can rebalance any day.
00:48:57
Speaker
right And now we've toyed with, we haven't done this, but we've toyed with you could actually take all possible trading days over, say, 20 years, and then you could score those trading days in the context of a buffer rebalance. And you could say which days were top decile for rebalancing. it for a good outcome and which days were bottom decile and creating a model that allows you to score the day.
00:49:27
Speaker
So, hey, buffer whatever rebalanced on august October of whatever was doing so on a really good day or a really bad day.
00:49:37
Speaker
Having that- define really good or really bad. Is it just the VIX or are we looking at other underlying volatility instruments? It's pretty much VIX. I mean, you could say it's volatility surface and we could have a really nu nuanced conversation about modeling volatility surface beyond st standard options data or market volatility data. And we've done some work in that regard.
00:50:00
Speaker
But the reality is you get the vast majority of the impact by just looking at VIX. Okay. So basically you could over time analyze, you know, what,
00:50:14
Speaker
what the what the vix
00:50:19
Speaker
block of of numbers, right? Like what your, the span of when VIX is in this range, that was the word I was looking for, range. This is typically a good time to rebalance versus when VIX is at extremes on the curve, those are bad days to rebalance. And you kind of know, cause you have enough data in your sample, you know,
00:50:47
Speaker
where those extremes sit, correct? That's right. Yeah. And I would also assume that you could probably also do some correlation um that would show that as well.
00:50:58
Speaker
Yeah, there's no end of analysis you could do of the VIX days. And I think for an investor, and we may put this in our research reports, We could just say, hey, on the last day, this thing rebalanced.
00:51:12
Speaker
How does it grade out? A through F. Was it an A day or was it an F day? And why? We think that would be really helpful for people if they could just go, oh, for the current year, this thing's getting a bad grade for its rebalance day.
00:51:28
Speaker
And it's not going to be a good instrument because of that. So let's talk about your offering and we'll put up ticker in the notes and for compliance purposes, we won't say it.
00:51:40
Speaker
But let's talk about when you launched it, how you've been approaching it and sort of how your thesis all along, because prior to launching the instrument,
00:51:53
Speaker
You were doing the research, you were monitoring it, you had managed these portfolios before, but you can have a thesis of how this will play out in a different structure with larger asset bases. But how does that kind of, how has it gone so far?
00:52:09
Speaker
Yeah, so interestingly, and this is through last Friday, i haven't updated it since then, but we were actually, since our launch date on October 8th, we were actually a few basis points ahead of the underlying SPY.
00:52:23
Speaker
who How do you do that with an insurance, with a product that has insurance inside? And it's random, it's a function of the path the market has taken. So the market took a path that has been, let's call it tepid,
00:52:38
Speaker
and a little bit challenged, a little bit sideways at certain times and kind of making gains, giving gains up, that kind of thing. And so, ah if If you look at the particular path we've taken, it's going fine. Now it's interesting to me that we're actually lagging, the not all the ladders, but some of the ladders and some of the bigger ladders out there.
00:53:02
Speaker
And it's because we have an undifferentiated market environment. we Nothing's capping out right now, or the vast majority isn't capping out because the market's kind of stalled and going sideways-ish.
Managing ETFs in Volatile Markets
00:53:15
Speaker
It's a far more normal environment. So we are from October 8th, we're about four months into this and we're up about 3%.
00:53:23
Speaker
three percent And so in the underlying market that is. And so if the market's up three over four months, it's going to be up under 10, which is nowadays that's been rare, but you're underneath caps of a lot of these buffered structures. And so when they're not capping out, the ladders look fine.
00:53:41
Speaker
It's only when you get a market with upward, more upward drift. What about highly volatile markets where you can take advantage of how volatility affects the underlying option prices, where maybe the market itself, is its return is irrelevant, but if the VIX spikes and volatility spikes because of some geopolitical event or tariffs or a tantrum of some sort, is there an opportunity there? And how would you handle something like that in the way that you manage this portfolio?
00:54:11
Speaker
Yeah, so you know, our unwritten rule, well, it's a written rule, actually, but it's not. It's the prospectus. It's not in the prospectus, but it's the way we're thinking about our package of options is that we have a number of days where the delta is below X. If we get five consecutive days where the delta is below X, we will rebalance. Mm-hmm.
00:54:33
Speaker
We don't have to, and it does depend upon our assessment of ambient market conditions. So if we're in a vol spike and the market's selling off, when you're in vol spikes, you usually have some downside shock.
00:54:49
Speaker
Usually you want to just hold your options package and let the market heal, let the theta impute, and find a better time to recast when volatility is moderating.
00:55:05
Speaker
So during the shock is typically not the time you wanna rebalance. You wanna have a steady hand in that case. Now, if you talk about the volatility of volatility and you- So that's, is that Roe?
00:55:24
Speaker
Because I know, is volatility sigma, Roe's interest rates. Yeah, the vol of vol's gamma. Oh, there you go. And sigma is vol, right? But little Sigma, not big Sigma, right?
00:55:36
Speaker
You're just trying to react to the vol of vol. So all you know it's never all else equal. But if you have if you're needing to rebalance or wanting to rebalance and you're looking at the vol structure of the market, you might say, hey, it's high right now.
00:55:57
Speaker
Let's only commit to a four month tenor. We can do by perspective, prospectus between four and nine. We might take a shorter view and say, we're going to get a better chance.
00:56:08
Speaker
why We're not going to buy a long day a longer dated option package and have to deal with that. We're going to take a short one and redo this because we think shorter is better in a vol spike.
00:56:21
Speaker
Okay. We've jumped into the Greeks and we've taken our audience on a bit of a ride here. And I'm sure some people are still like, wow, this is really complicated. And in essence, I actually want that to somewhat be what our listeners leave with is that this is complicated and you have been sold a bill of goods that tries to simplify what is inherently not simple.
00:56:44
Speaker
And I want your eyes to be open to that because that is what has always been my big thing with buffers is that, look, I don't like them because i think they're inherently misused and sold in a package that's pretty, but doesn't actually capture the complexity.
00:57:05
Speaker
And because of that, you're setting yourself up for questions you can't answer and a client experience that could be suboptimal.
00:57:17
Speaker
As we wrap it up here, i want to leave our audience
Critical Questions for Advisors
00:57:20
Speaker
with a couple of things. The first thing is, if you were evaluating buffers, if you're a financial advisor and you really like them, if they were to take a step back, what are the three or four questions that they should get in the habit of asking every time they evaluate a buffer?
00:57:39
Speaker
Yeah, and your point that they're making simplifying assumptions and simplifying language to help people invest and feel comfortable, I would say don't do that.
00:57:53
Speaker
First of all, don't do that. Have an eyes-open conversation about what's actually inside and that there can be periods where these things do things that maybe you wouldn't expect based on the way they're presented.
00:58:10
Speaker
And so have a very above board conversation that these are options packages and they do certain things. And while it is true that if you hold them to the very last day, you will get an outcome that can be predefined.
00:58:26
Speaker
You can't say where the market will be, but you can say if the market does x then these will do y Like you can say that, But the price of doing so is just so very, very high.
00:58:39
Speaker
And there is a better way to do it, especially if you're in an instrument that provides you with daily liquidity. Why would you not take advantage of the ability to trade these and position just yourself in something that gives you more of what you want instead of less, which is more downside protection, more upside participation, more intentional downside protection, more intentional upside participation.
00:59:09
Speaker
That would be what I would want people to be left with. This idea that they're simple and easy is not true. I'm reminded of, i don't know if you back in the day ever met with Jacobs Levy, Bruce Jacobs. He said something that has stayed with me for many, many years. He said, Eric,
00:59:27
Speaker
For every complex problem, there is a simple solution and the simple solution is almost always wrong because complex problems require complex solutions. And that's really, if there's a pithy phrase for what we're trying to do here, it's we're trying to understand the complexity with math and tools that help us do it better.
00:59:49
Speaker
Yeah, I love, actually love that. i That's an absolutely fantastic, just general way of approaching these things. Because again, i think our industry and a lot of advisors, I think, want desperately to find simple ways to explain complex things because it makes their job easier.
01:00:13
Speaker
But I would implore advisors to think about the value they add here is in managing the complexities and being open about them.
01:00:26
Speaker
Because you don't have to go down the rabbit hole like we just did for the last hour of all of this conversation with your client. But you should have them understand that this is complex and that's why they hired you.
Reflections on Life and Order
01:00:42
Speaker
And give them some expectations of what the ride's going feel like. And i think ultimately that's what advisors and their clients want. The reason people are so attracted to defined outcome is because it's defined.
01:00:56
Speaker
But the reality is everything, every day, and every minute that we live is in completely unpredictable. It tends to go the way we think, but not always.
01:01:10
Speaker
and Every aspect of your life is like that. And whether we're talking financial markets or we talk about just life in general, I always like to say, i was going about my life just fine.
01:01:24
Speaker
And suddenly a Saturday morning, I got a phone call that my partner was dead. He just didn't wake up. And then, okay, I absorbed that that wasn't a good day. Didn't see that coming.
01:01:38
Speaker
couple months later, all of a sudden, here I was, perfectly healthy, never had any serious health problems in my life, never had any physical ailments, nothing. And, oh, by the way, you have a broken back and you have breast cancer.
01:01:52
Speaker
And that literally happened in a week. Mm-hmm. as much as we want so badly to understand like what's gonna happen tomorrow or the next day or whatever, there's something quite freeing about just accepting that we have no idea.
01:02:10
Speaker
And yeah in a way that's what we're doing here with Buffered ETFs is- For sure. In reality, we're just accepting that like we have a general idea and there is a potential we can have a defined outcome or we can do it better and give up that defined outcome knowing what the underlying return expectation is and what the ride will feel like.
01:02:35
Speaker
Because to get the defined outcome, the ride is unpredictable. The human experience is the world is chaotic. And what human beings try to do is they try to create the perception of order amidst the chaos.
01:02:52
Speaker
That's why all of our houses have four walls. They're square, they're you know very neatly put together to give some sense of order. And I think the human need for order is so high.
01:03:04
Speaker
That's really what these buffered ETFs are addressing, the desire for order from chaos. And what you and I have been discussing, and and by the way, I'm sorry to hear about all those things that you went through. That's absolutely terrible.
01:03:19
Speaker
And Yet you're acknowledging that is life. It's unpredictable. It's chaotic. It's not orderly. But the human desire for those things is so great that a product like this gets traction in the marketplace for that very reason.
01:03:35
Speaker
order from chaos. And I guess what I'm saying is they the world's a little more chaotic in these buffers than the marketing literature would lead you to believe, but they still do something important for people.
01:03:48
Speaker
They still meet that need to have less volatility for certain kinds of investors. That can be the thing that allows them to amass more wealth because if they didn't have that guardrail, they might sell the market at the bottom and make all kinds of mistakes.
01:04:05
Speaker
So they aren't terrible. They serve a purpose, but you have to manage them and you have to be thoughtful and you have to get as much data as you can possibly get to understand them as well as you possibly can.
01:04:19
Speaker
Well, I'm really glad that we now have a resource like Buffer Labs. Why don't you tell our audience where they can find more information about Buffer Labs and what you guys are doing?
Accessing Buffer Labs' Research
01:04:29
Speaker
Sure. And we haven't brought our research online from the time we got licensed with the SEC for our ETF, but we will be bringing the research reports back online.
01:04:40
Speaker
That's at www.bufferlabsetfs.com. We're launching some universe data. We have an index on there that we're maintaining. There's good information.
01:04:51
Speaker
And then our fund itself is www.bufferlabsetfs.com. B-F-L-B-E-T-F.com. Awesome. And I will put those links in the show notes. I'll also put a link to Eric's LinkedIn page. Eric is always posting really good information on this topic on his LinkedIn feed.
01:05:14
Speaker
It's actually what led us to have this conversation. It's what led me to want to have Eric on the show because he would post that stuff and it would trigger me. every time I see anything buffer related, i get triggered. But then I started reading it and thought, wow, this is good stuff. And there's no one else doing it. So I'll put that in the show notes as well.
01:05:34
Speaker
I just want to thank you so much for coming on. i know it's been a long time, but it's been awesome catching up. Hear about what you're doing. And I particularly love the mission of what you're trying to achieve here because it's not so unlike my own mission.
01:05:50
Speaker
Really great. I wish you all the best as you build out your company. I'm hoping for the best for us. And what I would say is if the chance happens for me to come on a specific event that is interesting in the buffered space, I would love to do that as a standing offer. Awesome. We appreciate it. And I want to thank our listeners for tuning in to today's episode. We're happy to have you here We hope you walk away with a better understanding of buffer products.
01:06:18
Speaker
And i will admit that they do have a time and place. But if I were going to do buffers, I would want to do it your way. And I am not skilled enough to do it. So having someone like you out there is exactly what we need. As always, please like this episode, subscribe to our podcast, wherever you may find it.
01:06:40
Speaker
Leave us a review. We'd love to hear what you think of the show and what we're doing. If you have a topic or a guest that you think we should have on, let us know. We'd appreciate it.
01:06:50
Speaker
With that, I am Shana Orzik-Sissel, the founder and CEO of Bonner and Capital Management. And this is What's the Alternative? get your be
01:07:02
Speaker
The opinions expressed on the What's the Alternative podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or in any specific security. This is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.
01:07:29
Speaker
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01:07:42
Speaker
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Speaker
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01:08:14
Speaker
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Speaker
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Speaker
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