If an ETF focused on the buy now, pay later market, could investors borrow via PayPal to acquire shares?

The answer is probably not. But there is a forthcoming exchange-traded fund, seeking the Securities and Exchange Commission’s approval, that would invest in short-term consumer debt issuers. While there are funds on the market with exposure to the likes of PayPal and Affirm, ones concentrated on the BNPL business are hard to find. The VegaShares Buy Now, Pay Later ETF would seek out financial-industry securities based on assessments of issuers’ competitive positions, risk management, leverage, and price relative to peers, according to the initial prospectus filed earlier this month.

The ETF may have to answer at least two questions, said Todd Sohn, ETF strategist at Strategas. One of which is whether the timing is right: is the launch coming at an advantageous time in the economic cycle? The other, he said, “is anyone going to want to buy this in bulk, particularly in the competitive ETF space?”

Installments on Takeout

The BNPL business comes with some baggage and a pretty big stigma. While it makes money, it’s hard to argue that it operates in the best interest of consumers. The services have grown in popularity over a decade in the US, particularly among people who are the least financially equipped to borrow, according to a paper last month by economists at the Federal Reserve Bank of Kansas City. “Although BNPL services may help some consumers manage financial constraints by breaking down purchases into smaller installments and providing access to interest-free credit, the smaller, interest-free installments may also lead some consumers to perceive purchases as more affordable than they really are, increasing the risk of overspending, debt accumulation, and even default,” authors Fumiko Hayashi and Aditi Routh wrote.

High percentages of people who have used BNPL services have not fared well, data from a recent Motley Fool study show:

• Nearly a quarter, 24%, of such borrowers were late on payments last year, up from 18% in 2023.
• Fifty-eight percent borrowed for purchases they otherwise couldn’t afford, and 40% said they regretted using buy now, pay later after understanding the full costs.

Paying the Price: Still, it’s a market that is drawing investors. Prudential’s PGIM unit is buying up as much as $500 million in consumer debt from Affirm over three years, according to a report in The Wall Street Journal. The prospectus for the VegaShares Buy Now, Pay Later ETF did not yet identify the fund’s advisor, and the law firm representing it did not comment, citing company policy.

Ultimately, the market will determine whether there’s room for such an ETF, and a challenge will be getting assets that are sticky, Sohn said. “Those stocks … seem to come with a stigma. It’s almost like preying on unaware consumers.”

BlackRock is betting on the future of buffers.

Buffer ETFs that limit downside risk but also have caps on upside gains, are having a moment. Assets have ballooned from $5 billion in 2019 to $181 billion last year, according to recent BlackRock and Morningstar data. It’s expected to triple to $650 billion by the end of the decade. Despite the higher fees, buffer ETFs earn more than 10% per dollar invested per year over the past five years, per Morningstar.

The dramatic rise in buffer ETFs’ AUM reflects current market volatility and geopolitical turbulence, signaling a sea change in how financial professionals think about mitigating portfolio risk. “These products have staying power,” said Charles Champagne, head of ETF strategy at Allianz Investment Management. “They definitely have longevity.”

Bullish on Buffers

Defined outcome ETFs allow investors to buy stocks and sell them at their starting price even if prices fall, preventing losses, while also selling call options above current stock prices, limiting upside yields. The SEC’s 2019 decision to allow active ETFs set the stage for the rise of buffers, which are bought and sold at the beginning and end of a predetermined period. Down markets, like the investing environment of 2022, have also had a significant impact on buffers’ popularity, since they are increasingly regarded as a stand-in for fixed-income when equity markets are down, according to Champagne. Although the buffer market is currently highly concentrated — First Trust and Innovator dominate the space — it is likely to grow “from [both] an issuance standpoint and an asset standpoint,” he added.

“When the market’s looking iffy, advisors tend to allocate more to fixed-income for that diversification effect and protection,” Champagne said. “We’ve stress-tested portfolios… and what we found was, if you take about 10% away from fixed-income and 10% away from the equity allocation and move it into a buffer, it generally outperforms over a long-term horizon.”

Buffer ETFs are also being launched at breakneck speed. According to the BlackRock study:

• In the past five years, nearly 500 buffer ETFs have been launched.
• Last year, 27% of all new ETF listings were buffer funds.

Over the Hurdle (Rate). Much of the recent rise in popularity can also be attributed to the market swings following President Trump’s “Liberation Day” tariffs, as investors seek safe havens. Still, the period in which an investor buys a buffer can have a strong impact on its performance. AllianzIM offers a unique uncapped structure buffer ETF, with a limit of 15% on the downside but unlimited upside yields beyond a given “hurdle rate.” “It’s a really strong structure when you have a bullish view on the market,” Champagne said.

Consider it the third wave of ETFs.

First came the issuers focused on index-based strategies in new exchange traded funds. Then, there were the mutual fund shops that added ETF versions of products, or converted existing ones. Now, RIAs are building out products for their mass affluent clients. That is where the $6.5 billion independent advisor platform RFG Advisory’s Bluemonte Investment Management finds itself, said president Rick Wedell. The firm recently launched a line of nine ETFs spanning a range of asset classes that fit together in client portfolios, he said.

“You’ve seen the ultra high-net-worth space do this a lot,” he said, of family office portfolios becoming private ETFs for RIAs serving that space. “We’re doing this at the mass-affluent scale.”

Getting Low

Bluemonte, which is the internal investment management unit at RFG, has been moving assets from existing strategies into the ETFs this week, and there will be about $1.4 billion across the nine new funds by Friday, said Wedell, who is also a portfolio manager on the funds. The new, actively managed products have net fees of 23 to 25 basis points, with the exception of the Bluemonte Diversified Income ETF, which charges 75 bps. The low costs benefit clients, along with the in-kind redemptions allowed in the ETF structure that provide tax efficiency, Wedell noted. Using in-house funds that are designed to work together also helps ensure there isn’t overlap or style drift, he said. While the company isn’t initially marketing the ETFs externally, there have been some purchases by unknown investors since launch, he said.

Some basics about Bluemonte and the new funds:

• The unit accounts for about $2.5 billion of the $6.5 billion of RFG’s assets under administration.
• The ETFs include large cap core, large cap growth, large cap value, dynamic total market, global equity, core bond, short term bond, long term bond, and diversified income strategies.

“Wealth managers are increasingly shifting to ETFs for scale and tax efficiency,” said Todd Rosenbluth, head of research at TMX VettaFi. “It’s great to see a firm enter the market with a full suite rather than dip their toe in.”