Goldman Sachs rolls out suite of downside protection ETFs as market volatility picks up

Goldman Sachs Asset Management has thrown its hat into the ring of increasingly popular buffer exchange-traded funds, just as the stock market is showing some signs of fragility.

On Tuesday, the firm announced the launch of the Goldman Sachs U.S. Large Cap Buffer 3 ETF (GBXC). That follows two similar funds that launched in recent months. Each fund resets on a quarterly basis, meaning investors now have a fresh version to choose from every month.

Buffer funds fall into a category called defined outcome products that has attracted billions of dollars from investors in recent years. Buffer funds use derivatives, often in the form of equity-linked notes, to trade off some potential upside in the market for downside protection.

There is a wide variety of buffer funds on the market, with various levels of protection and upside participation. In the case of the new Goldman funds, they will protect against losses from 5% to 15% in the market, represented by the underlying SPDR Portfolio S&P 500 ETF (SPLG). In exchange, the funds have upside caps of between 5% and 7%.

Brendan McCarthy, global head of ETF distribution at Goldman Sachs Asset Management, said the firm believes that the 5% to 15% range is the “sweet spot.”

“The feedback we were getting from clients was, I’m in the marketplace. I can live with down a few percent. That’s kind of like what I expect. It gets painful when I’m talking down 5 to down 15,” McCarthy said.

Two key differences with the Goldman funds from other buffer funds is that most of the competitors reset annually instead of quarterly, and the Goldman funds have an additional floor built in. In addition to the 5%-15% protection band, the funds have an extra buffer that kicks in when the market is down roughly 25%, limiting total possible losses in each outcome period to approximately 15%.

Buffer funds are designed to be bought on or very near to the reset date and held throughout the entire period. The price of the fund can fall by more than the buffer zone indicates during the interim period, based on how options pricing changes over time.

“You could show a loss in your position, but as long as you hold on to it to the next reset, then you’ll get the published parameters,” said Stuart Chaussee, a registered investment advisor based in Beverly Hills, California, who regularly uses buffer ETFs from multiple fund issuers.

While the funds are designed for each outcome period, their impacts can compound over time if investors hold them through multiple resets. For example, if the market falls sharply one quarter but rallies the next, the rally in a buffer fund would come from a higher starting place.

“These are meant to basically kind of help you to sink less deeply to help you recover faster,” said Oliver Bunn, portfolio manager and global head of the quantitative investment strategies alternatives team within Goldman Sachs Asset Management.

Of course, the same is true in the opposite case. The performance of a buffer fund would suffer over time if the market was steadily climbing and exceeding the upside cap.

Some of the biggest other players in the buffer fund space are Innovator, First Trust and Allianz. The new Goldman Sachs funds have a 0.50% fee, which is cheaper than many of the largest buffer funds already on the market.

ETF launches are typically a monthslong process, and timing them to certain market periods is difficult. Still, the Goldman funds could be coming at just the right time for early adoption.

On Monday, the S&P 500 fell 1.76%, its worst session since December. The index is now 4.84% below its record highs.

Chaussee said clients often come to him asking about buffer funds when volatility picks up.

“With all the uncertainty that we have now and the fact that stocks are trading at lofty multiples, that’s when you may well have some protection on,” Chaussee said.