In many ways, these buffered ETFs mirror the way I manage my own portfolio. I invest £1,000 every year. The breakdown is £950 in a boring index fund like S&P 500 (VUAG, VOO, etc) that is well diversified and balanced. The remaining £50 goes to a YOLO stock of my picking (r/wallstreetbets fanatic here) - that can either double in the next 24 hours or (most likely) drop by 50% by end of the week.
This mostly works. The index provides the safety net, the high-risk YOLO bet provides the potential upside. Overall, because the index will slowly grow it compensates for the loss in the YOLO stocks. However, if the YOLO stock does go up, I get a nice return.
Setup
YOLO Sinks
YOLO Moonshot
The Product
Buffered ETFs package this concept into a structured product. The exchange roles of the securities though. A large portion of the fund is allocated to fixed-income securities, like Treasury bonds, which are designed to return the principal at maturity. Instead of the YOLO stock, buy 1 year at-the-money call options on the S&P 500.
The bond locks in your floor (the buffer), and the option allows the ETF to pass on a high percentage of the index’s gains (the cap) to you. The key is that this structure protects your principal from the initial market downturns while still giving you exposure to a significant portion of the upside.