Defined Outcomes Assets to Top $334 Billion by 2030: Cerulli
Buffered ETFs are surging in popularity, particularly among retirees, and that bodes well for their future.
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Some people just hate surprises.
Defined outcome ETFs, which minimize downside risk but place caps on potential gains, are on track to surpass $334 billion in assets by 2030 from just $69 billion today, according to Cerulli’s latest report. The rapid growth is attributable in part to an aging US population, as baby boomers near or reach retirement and try to limit risk in their portfolios. The shift could have profound implications for the future of retirement planning and the evolving ETF landscape.
“People are living longer,” said Greg Stumm, CEO of American Beacon Partners. “Because people’s investment time horizons are expanding, and their time in retirement is expanding, they need more equity exposure. But they can’t afford a lot of the big drawdown risk.”
Predictability Sells
Defined outcome products have several characteristics that make them attractive to older investors and those with a lower risk tolerance. For one, they can dampen volatility while providing exposure in volatile areas, like small cap stocks, emerging markets and cryptocurrencies. This can make unstructured outcomes more structured, said Jeff Schwarte, chief equity strategist at Simplify Asset Management. “We’re constantly asked, ‘What are your return expectations for the market?’ And it’s really, really hard to come up with a number,” Schwarte said. “When you start using derivatives, such as options, futures, swaps, you can take the uncertainty and make it more defined.”
Other findings from the Cerulli report include:
- Two firms, Innovator and First Trust, control more than 75% of the defined outcome ETF market.
- There are currently 28 firms with defined outcome products, which include everything from dual directional ETFs to those with a 100% downside buffer.
Long Live the Buffer. There are about 10,000 baby boomers retiring every day, which means plenty of room for buffers to grow, especially as people live longer. Still, risk-on products are better suited for those with more time to spare, Stumm said. “If you’re on a longer time horizon, a 40- to 50-year horizon, the attractiveness of downside protection may seem like it makes sense, but over a longer time horizon, the downside can be problematic,” he added. “For the right client, it makes sense.”
