BlackRock to offer two buffer ETFs that aim to limit investors' losses

The world’s largest exchange-traded fund issuer is setting its sights on a booming corner of the $6.9 trillion industry: ETFs that aim to limit investors’ downside by also capping their potential gains.

BlackRock is looking to set up two funds known as Buffer ETFs: the BlackRock Large Cap Moderate Buffer ETF and the BlackRock Large Cap Deep Buffer ETF. Both would track the returns of the $305 billion iShares Core S&P 500 ETF (ticker IVV), using options to try to reduce potential fluctuations in investors’ returns, according to a Securities and Exchange Commission filing.

Buffer ETFs have ballooned in popularity over the past five years, fueled by investors seeking safety amid pandemic-fueled turmoil, as Covid-19's impact weighed on economic activity was followed by soaring inflation.

The category now commands more than $20 billion in assets after the first such fund launched in 2018, Bloomberg Intelligence data show, attracting the likes of BlackRock.

“The growth has been tremendous, proving there is demand,” said Bloomberg Intelligence ETF analyst James Seyffart. “They are likely hearing from their advisers and end clients that they want products like this, or that clients and advisors are using competitor products.”

The BlackRock Large Cap Moderate Buffer ETF aims to protect against about the first 5% of the S&P 500 ETF’s losses per quarter, while the BlackRock Large Cap Deep Buffer ETF would cushion against losses between 5% to 20% over each calendar quarter.

Currently, the buffer ETF arena is dominated by Innovator ETFs, which helped pioneer the space with the launch of its first defined-outcome ETF in 2018. The buffer products, along with other relatively complicated products like leveraged and inverse vehicles, have drawn scrutiny from regulators.

Tickers and fees for the funds weren’t yet listed in the filing. BlackRock, which controls roughly $2.3 trillion across nearly 400 exchange-traded funds, will probably compete in part by cutting fees, according to Nate Geraci of the ETF Store.

“BlackRock likely views buffer ETFs as low hanging fruit and simply too juicy of an opportunity to pass up,” said Geraci, president of the advisory firm. “I would expect BlackRock to significantly undercut existing buffer ETFs on fees and put meaningful marketing muscle behind this effort.”

[More: Competition for active ETF dominance heats up]