‘Volatility Will Likely Be Hanging Around’ — TrueShares CEO On Rising Demand For Buffered ETFs – TrueShares Structured Outcome (August) ETF (BATS:AUGZ)

Market volatility has been most notable over the past few weeks, leading investors and advisors to reevaluate risk management. One part of the ETF space that has drawn more interest is buffered ETFs, with special attention on the TrueShares Structured Outcome (August) ETF AUGZ.

This outcome-based product is designed to deliver downside protection with some participation in market appreciation. To learn more about how these funds are changing and why they are becoming more in demand, Benzinga interviewed Mike Loukas, CEO of TrueMark Investments, the parent company of TrueShares ETFs.

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The Rise Of Buffered ETFs In A Volatile Market

“We have absolutely seen an uptick in interest with not only our buffered strategies, but also anything in the volatility management or hedged category,” Loukas said. “Many advisors and investors were well positioned for these types of market gyrations, others most certainly weren’t and went scrambling for cover in the form of structured outcome ETFs.”

Loukas feels this trend reflects more than a fleeting response. “We witnessed the beginnings of a paradigm shift in how portfolios are structured during the pandemic. Then the second leg of the transition occurred in 2022. Two straight years of strong S&P performance reduced the sense of urgency a bit, as you would expect, but those multi-asset class air raid sirens going off over the past few weeks have really sobered investors up. This happens when the market lulls us into forgetting that returns aren’t sequential, they’re lumpy. Uncertainty has an uncanny way of repositioning investment outlooks for significant periods of time, and its timing is impeccable. “

Incidentally, investors have been scrambling for shelter from the highly volatile market to buffer ETFs, pulled by the offer of a cushion against possible losses in exchange for a cap on potential gains.

As of mid-March, as the sharp retreat of the market, “buffer” ETFs have raked in $2.5 billion of funds in a month, according to CFRA Research, cited by Reuters. This year thus far, the investment category has pulled $4.7 billion of inflows.

On Monday, as the S&P 500 recorded its sharpest dip of the year, buffer ETFs quietly added $140 million in net assets, according to CFRA.

Rethinking Traditional Buffered ETFs

Buffered ETFs have become a mainstay for risk-averse investors, but their limited upside potential can sometimes frustrate investors.

TrueShares has done something different. “We believe that returns are lumpy and upward moves come in large chunks rather than the nicely packaged calendar year, annualized returns we’re so used to seeing in the investment business.  While it’s widely held, and plainly obvious, that mitigating drawdowns is beneficial to a portfolio, far less attention is paid to the impact of missing out on significant upside moves,” Loukas said, adding that addressing both ends of the volatility spectrum is he best approach to volatility management. 

“Mitigating drawdowns AND capturing as much of those lumpy up years as possible within one strategy, which necessitates an uncapped approach.”

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The Uncapped Method: How AUGZ Functions

TrueShares’ Structured Outcome (August) ETF is a good example of this method. In contrast to standard buffered ETFs, AUGZ uses an uncapped structure that seeks to deliver downside protection while enabling unlimited upside participation.

“By using an underlying options position that has fewer moving parts (selling out-of the money puts and buying at-the-money calls) than many of our peers , we position the portfolio to participate in a percentage of the upside move with an unlimited ceiling.  The downside mitigation or buffer is established in a similar manner to many other buffered ETF versions,” Loukas said.

The downside protection in AUGZ is designed with an 8-12% protection on loss over a period of 12 months, providing investors with a way to preserve exposure to market gains with the limitations of a cap.

Performance and Market Outlook

Loukas emphasized that buffer strategies are not meant for short-term tactical moves. “It takes some time for their defined outcomes to play out. Our fully hedged products fit that mold a bit better.”

Looking forward, Loukas sees market uncertainty as ongoing, reaffirming the necessity of structured risk management approaches like buffered ETFs. “Volatility will likely be hanging around for a while.  So if you’re out there bargain hunting in the AI space or leaning on sturdy dividends, don’t forget to give your core equity exposure some love and add some drawdown protection.”

The Future Of Buffered Strategies

The success of buffered ETFs has prompted speculation as to their development beyond equities. Loukas foresees opportunities for the same tactics in fixed-income and other asset classes.

“The ETF industry tends to slice and dice any good investment approach into any number of versions once it experiences success. I have no doubt the same will occur with buffered strategies.  We’re seeing plenty of it already.  If there’s a reference asset and an options market, a defined outcome strategy probably isn’t too far behind, ” he said.

With investors facing an increasingly volatile and sophisticated market, a product such as TrueShares’ buffered ETF provides an attractive balance between growth and risk management. As structured outcome strategies continue to evolve, the future of ETF investing promises only more innovation.

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