How good is BlackRock’s new 100% downside hedge ETF?

BlackRock, the world’s largest asset manager, has just launched an ETF that offers 100% downside protection to investors. The new ETF (MAXJ) will have its maximum gains capped at 10.6% while protecting against the downside for a duration of 12 months.

At a time when interest rates are high, presidential elections around the corner and a lot of uncertainty with regards to the economy, the 100% downside hedge ETF provides investors a way to benefit from the market rally without any downside.

Rachel Aguirre, the head of US iShares product at BlackRock had this to say about the new ETF:

With record levels of cash sitting on the sidelines, many investors are looking for tools to help navigate market volatility before they step back into the market

This is not the first time a 100% downside hedge ETF has hit the market. Innovator ETF offers a similar product under the ticker Innovator Equity Defined Protection ETF (JAJL) while the Calamos S&P 500 Structured Alt Protection ETF (CPSJ) has also gained investor interest due to the same downside protection.

How do 100% downside hedge ETFs work?

A 100% downside hedge ETF is also sometimes referred to as a defined-outcome ETF, or simply as a buffer ETF. It uses options strategies to cap the upside at a pre-determined level and at the same time eliminate the entire downside.

While all that sounds attractive, there are a few things investors need to consider before they can buy this ETF. In order to maximise your returns, you need to hold on to this ETF for the whole duration of 12 months. If you buy in the middle of the cycle, then you are not utilising the full protection that the ETF provides.

This means that you need to take a decision right at the start of the ETF launch. Fortunately, such ETFs are launched every three months. So even though you can’t time your entry into this ETF to maximise returns, you can wait for the right time to buy the right ETF as it is launched. BlackRock has confirmed that it intends to issue a new series of its MAXJ ETF every 3 months.

As with all ETFs, the expense ratio cannot be ignored. In the case of MAXJ ETF, it stands at 0.5%. While not a considerably high fee, it still needs to be factored in by potential investors.

Should you buy the 100% downside hedge ETF?

Buffer ETFs are likely to gain popularity over the course of next few months as the market continues to break all-time highs in an uncertain and high interest rate environment. Political temperature will be at its peak in a few weeks from now and nobody would want to expose their assets to the downside risks that such events can spark.

Buffer ETFs therefore provide the ideal trade-off between risk and reward, especially for the conservative investors.

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