Buffered ETFs Go Head-to-Head on Fees

Newcomers find an opening to compete on fees in the buffered ETF space.

Buffered ETF strategies that offer investors downside protection in exchange for a cap on performance have been gaining popularity over the past few years, and as more issuers enter the space it might be time to reevaluate the growing list of ETF options. 

Assets in the category now exceed $22 billion across about 170 funds, up from about $200 million in 2018, according to April 2023 research from Morningstar analysts Lan Anh Tran, Bryan Armour and Zachary Evens. Investors and financial advisors can and should be shopping around in the space. 

As Lan Tran sees it, the buffered ETF space is quickly evolving into something where the biggest distinctions between funds are often the fees. 

“The specific buffers can be set at different levels, but there’s not all that much difference in terms of how they are setting them up,” she said.  

Buffered ETFs Competing on Price 

Buffered strategies, sometimes called defined outcome, require options trading capabilities and larger firms have an economies of scale advantage. But, in an age of widespread fee compression, it is difficult to comprehend why fees on essentially the same ETF strategies can range from 0.85% down to 0.29%. 

Innovator and First Trust stand out as holding firm at the higher end of fees that were set when they essentially created the category five years go. 

But while the FT Vest U.S. Equity Deep Buffer ETF-January (DJAN) might be able to justify a 0.85% expense ratio, Lan Tran said investors can get essentially the same buffered protections from the Parametric Hedged Equity ETF (PHEQ) for 0.29%. 

To be clear, the two ETFs are not perfect apples-to-apples comparisons. DJAN, like a lot of buffered strategies, has a specific lifecycle that requires investors to buy on a start date and hold to maturity to gain the full benefit of the buffers. 

PHEQ, by comparison, uses a laddered strategy that offers investors the ability to buy at random intervals. 

“Why would you pay more than 80 basis points when you can get it all in one with a laddered product,” Lan Tran said. “The concept is the same for both ETFs; they’re using a set of options to achieve an outcome profile.” 

Those issuers that were first to the buffered space gained the coveted first-mover advantage. But newcomers are starting to find an opportunity in what might be the start of a fee war for buffered ETFs. 

“It’s not that hard to come in at a lower price point and do it well,” said Matthew Collins, vice president of exchange traded funds at PGIM Investments in Newark, New Jersey. 

PGIM, through its insurance origins, has a long history of using structured products and annuities to create buffered strategies. But it entered the buffered ETF space earlier this month with an expense ratio of 0.5% 

“Find the buffer you like, and make sure you have confidence that the manager knows how to buy options,” Collins said. "We’re talking inside baseball differences in terms of the ETFs.” 

Contact Jeff Benjamin at [email protected] and find him on X at @BenjiWriter