Buffer ETFs: Solutions For Equity-Market Uncertainty
Given the rapid growth of buffer ETFs, PGIM Quantitative Solutions provides an overview of buffer ETFs, benefits for investors, and investment considerations.
Volatility Lifts Demand for Defined Outcome Solutions
Dec 12, 2024
Amid rising market uncertainty, investors are increasingly turning to defined outcome solutions to balance between access to growth and exposure to risk.
Amid rising market uncertainty, investors are increasingly turning to defined outcome solutions to strike a balance between access to growth and exposure to risk. Defined outcome solutions, such as buffer ETFs, enable investors to participate in the market’s upside (to an agreed-upon level) while limiting losses on the downside. The trade-off reduces volatility by defining potential outcomes into a narrower return range.
CATALYSTS FOR MORE UPSIDE MOMENTUM
At two years old, the current bull market is still young with potential for more room to run. The Fed’s easing cycle and expectations for a pro-growth-focused policy agenda may serve as catalysts to keep this momentum going in 2025. Paradigm shifts being driven by secular trends, like artificial intelligence, may offer continued support for more outsized returns going forward.
THE CASE FOR CONTINUED VOLATILITY
The stock market’s remarkable run has elevated price-to-earnings ratios. While multiples marginally contracted over the past two years amid restrictive monetary policy, equity valuations significantly expanded following strong performance in 2024. With certain markets priced for perfection by some estimates, there is increased potential for volatility – whether from earnings misses, delayed rate cuts or geopolitical surprises – to prompt mean reversion.
ELEVATED EQUITY VALUATIONS
Source: Bloomberg as of 11/30/2024.
Devang Gambhirwala
Portfolio Manager of PGIM Quantitative Solutions
Since markets historically have an upward bias, investors tend to benefit over the long term from staying invested. Using defined outcome solutions, like buffer ETFs, can help investors stay invested while helping protect against downside volatility.
Related Insights
Secular Growth Trends Weather Cyclical Changes
As market breadth expands, active managers focusing on resilient secular growth trends are poised to reap the benefits of the new market regime.
ACTIVELY INVESTING THROUGH PARADIGM SHIFTS
PGIM asset managers highlight key trends and related opportunities that they believe warrant the most investor attention as 2025 gets underway.
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