It's not about being the richest person in the graveyard. It's about being able to be consistent with growth and lowering your risk, especially at the beginning of your retirement. Welcome to the retire on time podcast. I'm Mike Decker here with David Franson from Kedrick Wealth. As always, text your questions to (913) 363-1234, and we will feature them on the show.

Just remember, this is not financial advice. Do your research so you can do what is right for you. David, what have we got? Hey, Mike.

What's the difference between a dynamic buffered ETF and a target outcome buffered ETF? Getting technical here. Yes. There are lots of little buzzwords there.

The the listener is getting much more sophisticated than your, maybe average adviser. Mhmm. Dare I say.

Yeah. I can't tell you how many times I've said, hey, why don't you use buffered ETFs? The two answers I get from financial professionals are one, what are those? Or two, I've I've got a good thing going. I don't I don't need to learn all these like, we're we're fine.

Oh, no.

That complacency just drives me nuts. Uh-huh. So for all those who wanna skip the adviser and go right to Yeah. A tool that may be used, basically, the whole concept of this is saying, I'm concerned about a market top. I want some protection, and I don't know if bond funds are the right bit for me.

Annuities, they're not liquid, so that concerns me. I'm looking for just a different way to go about it. Structured notes are illiquid for a certain period of time. I just want some protection mechanism in there. Entry level in introducing buffered ETFs.

Okay. Alright.

Now I think the the majority of buffered ETFs, just a quick shout out, there's really two companies that do these pretty well. Oh. You have First Trust, who they don't really advertise to the public.

So I'm just letting you know they exist. They didn't endorse me to say this at all.

It's just you can Google First Trust buffered ETFs, and you're gonna see a whole array of them. And then you've got Kalamos.

Okay.

Kalamos is another one. Just Kalamos buffered ETFs. They take up the majority of the market share, and they do really well with how they build them, price them, and so on. BlackRock also has a couple that are out there. They're they're entering the space as well.

So do we do we anticipate that more companies will start?

Yeah. I I think so. Yeah. I think so. This buffered ETF, in my mind, is the securities world, their version of what the fixed indexed annuity has been doing for many years.

Oh, okay.

Providing upside protection or upside growth potential Mhmm. With downside, not protection because there's no guarantee on these. It's just downside buffers or hedging against it. So here's here's roughly what you'd what you'd expect is, let's say, you can get up to 10% or up to, let's say, 14% of the S and P, but you're gonna have the first 10% on the downside buffered out. So if the markets go down nine percent, you don't lose anything.

You just have the expense ratio. If the markets go down 20%, the first 10% was buffered out, so you would basically only lose 10% or half.

Right? So that's that's the idea. You're giving up some of the upside to have some downside hedge or partial protection or protection within a certain range. That's it.

Let's not play with the game that this is better than it is. It's just black and white. Nice and simple.

And this is probably for people who are need this money for their income. They're they're retired.

No. This isn't really an income problem.

Product. Yeah. This is this is for portfolio. We use it for the reservoir.

Oh, I see. I see.

So that's our income necessarily play, but not everyone uses it for income. Mhmm. This is more often a bond fund alternative. So take your typical portfolio Uh-huh. 60% stocks, 40% some bonds.

It's stock funds or equity funds. Bond funds is typically what ends up being. Well, bond funds aren't very they're not very good. I don't I just I don't like bond funds. Generally speaking, there are times where it makes sense.

But for the past decade, most of the time, in my opinion, they didn't make a lot of sense introducing buffered ETFs.

Now the more protective or the less risky ones, they're typically called, like, max buffers.

They're maximizing not 100%, but not as much as they can. So you might get, like, 7% on the upside and 50% on the downside. So these are target buffered ETFs. The question was, what's the difference? Yeah.

Target target buffered ETFs, it's a one year point to point typically to where if you put money in or around the date that it starts

Mhmm.

That a year from now, if the markets go up, let's say it's a max buffer, the markets go up 10%, you might have 7% because you're capped at seven. Market goes up 20%, you're still around that seven, and then you have to account for expense ratio.

So fees.

The markets go down 30%, you don't lose anything, just fees. Markets go down 50%, you didn't lose anything but fees if there was a 50% buffer.

Oh, I see.

That buffer, that downside changes over time. So you can't buy and hold it with the same buffer. Some years, it's, like, 90%. Some years, it's, like, 50%. Some years it's 40%.

It's whatever the market allows them to buy in. There's so that pricing is going to affect the protection that you can possibly get. Mhmm. Hence why they're not principal protected, but they offer protective mechanisms to help from the downside.

Now, that's kind of the OG, the original when it comes to the just structured one year. It's it's almost always one year. Very, very simple. Then the dynamic buffers Mhmm. We're coming out as well.

Dynamic buffer just says, well, what if we take one ETF or one fund and we just blend all twelve months of the target buffers? So it's not like you can't not go down. Don't you love that double negative?

Yeah. Right.

You're you're going to go up or down, but it's the hybrid or the compilation of all of the 12 buffers in one, which basically says you've got upside growth, and it will take all of the pricing of all of the 12 ones and slowly let you grow with the S and P. But if the markets go down, you're not gonna go down as much with it because that dynamic nature of a lot of it being buffered out. So it would slow down the decay of the market collapse.

Alright.

So I'd love to give you hypothetical, just rough examples. I don't wanna, you know, promise anything or say something that I can't illustrate.

Alright.

K? So that's that's the tricky part with this. But you can look up. Here's I mean, here's a couple of them. So you've got from First Trust BUF D, B U F D, and B U F V.

So BUFD is better for a deeper crash. BUFV is for a lower crash. Those are the first trust dynamic buffered ETFs. Okay. IVVM is one from BlackRock that's also pretty popular.

And then IVVM are more dynamic, so it's more like the buff buff v as in Victor.

It's gonna slow on the downside, but you're not gonna get all of the upside or as quick of the up as much of the upside as possible. You're gonna kind of cap out if the if the markets have great returns.

So all things considered, what I appreciate about this is the humble investor who says, we may be at a market top. I'm not trying to get rich. I'm trying to stay rich.

I'm not gonna try and time the market, but I wanna slow down the downside risk.

So they might, instead of having sixty forty split, say, well, gosh, maybe I'll have 50 or 40% in stocks. And so my bond funds, I'm putting in buffered ETFs, and they're just doing a different version of an allocation plan

That just has these that are I I wanna say more stable. They're not they're not fixed income. They're just they've got less downside risk even though they're giving up some of the upside potential growth. They have a smaller range of what they could do.

That's what I was just gonna say. It sounds to me like the the when you look at, like, a a typical, like, line or of of stock valuations, right,

it

can be like a roller coaster. It sounds like maybe the roller coaster is much smaller on a buffered.

Yeah. You're you're downgrading from the Six Flags thriller to the Snoopyland kid ride.

You're not gonna get hurt on that one.

No.

But that's okay.

It is.

I mean, when you're retired, it's not about being the richest person in the graveyard. Yeah. It's about being able to be consistent with growth and lowering your risk, especially when you retire at at the beginning of your retirement. Mhmm. Because that's when you have the most longevity risk.

Alright. If you're 80 years old, 85 years old Yeah. And you've got, like, five years left

And you could just ladder all that out with, like, CDs. Mhmm. Right? Because you have enough money. You're not gonna spend it all.

Your portfolio could be very different than someone who's 60 years old

Yeah.

And might have twenty to thirty years where they need their money to last. They can't take it on the chin with a significant market crash. So buffered ETFs, I have found to be an effective tool to incorporate in a growth portfolio just to bring a different element to lowering the volatility Yeah. The roller coaster.

Yeah. And do we think or do we know, like, if these are similar to bond funds, is one cheap

They're not technically similar to bond funds.

Oh, yeah. Yeah.

Correct. Because it's equities with option contracts that are the buffers. Bond funds are debt instruments. It's a different asset class altogether.

Great. Yeah. Great.

Okay.

Great point there. And are

is is one more expensive than the other? Like, is the expense ratio of a buffered ETF, would it be less than maybe a bond fund? Or

I mean, some bond funds can be very pricey, but generally speaking, bond funds or ETFs Uh-huh. Are cheap, cheap, cheap.

Okay. Alright.

And buffered ETFs, not as cheap.

Oh, okay. Okay.

But if you look at net of fee performance

I would wager that bond funds have more growth potential net of fees. And the reason is if bonds have averaged two or 3% year over year, and you might expect let's say a max buffer ETF that has up to 7% growth, 50% downside buffer. If you have that for a couple of years, you might average around 5% growth net of fees. Might keyword. These are very

Yeah.

General assumptions. Situations are gonna change, but I would I believe buffered ETFs have more growth potential

Than bond funds. Fair enough. They both have risk. They both have benefits and detriments. But, yeah, dynamic is more of a set it and forget it, nice long term strategy, a nice long term play.

Target is more very rigid from this point to this point, this is what I'm getting. Yeah. And those play well into different scenarios for different types of investors. Mhmm. Thank you for watching this show.

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