How does this sound? You invest in an exchange-traded fund (ETF) that tracks the S&P 500 for the next year, and no matter what happens, you are guaranteed not to lose money—but if the market soars, you can’t earn more than 10%. That’s the trade-off promised by “capital-protection ETFs” being offered or rolled out this year by fund families such as Calamos Investments and Innovator ETFs.
These products are the newest version of “buffer” ETFs. They use the same hedging techniques that professional investors use to protect against market drops and to reliably produce maximum and minimum amounts you can gain or lose over a defined period. Example: The Calamos S&P 500 Structured Alt Protection ETF (CPSM) will match the performance of the S&P 500 index for the next 12 months up to a maximum of 9.81%. If the index returns 5%, you earn 5%. If returns are negative, you earn 0%. Calamos will roll out new versions of this ETF quarterly, as well as similar funds that track the performance of the NASDAQ 100 and the Russell 2000. Innovator ETFs offers the Equity Defined Protection ETF (TJUL) with a maximum gain of 16.62% over a two-year period and complete downside protection. New versions of this ETF launch quarterly.
Our expert’s take: Risk-averse investors may not see the need for these new ETFs now since you can earn an annual 5%+ return on US Treasuries or CDs. But when interest rates shrink in the future, these funds can be useful for retirees or folks who need to tap their portfolios in the next year and cannot stomach short-term losses. Important: To get the full promised upside potential and downside protection, you must purchase a fund on the day it is launched and hold it for the stated term.
