In today’s market, where balancing growth and protection is increasingly challenging, Allianz Investment Management introduces an exchange-traded fund (ETF) solution that reshapes traditional equity exposure for advisors and their clients. The AllianzIM U.S. Equity Buffer15 Uncapped Aug ETF (ticker: AUGU) offers a distinct, buffered approach to equities, allowing investors to maintain growth potential while managing downside risk.
At the 2024 Future Proof conference in Huntington Beach, Johan Grahn, Head ETF Market Strategist at AllianzIM, joined The Wealth Advisor’s Scott Martin to explain how his firm’s buffered ETF strategies provide advisors with a versatile tool to deliver both growth and predictability, a vital tool in a challenging market.
Moving Beyond the 60/40 Split
For decades, the 60/40 portfolio model—60% equities and 40% bonds—was a go-to for diversification. However, Allianz sees the need for a more flexible, modern approach. Grahn highlights the importance of “helping people embrace a new way of investing,” adding that the rigid boundaries of modern portfolio theory could benefit from more adaptable structures. The AUGU ETF is designed to align with this vision, giving advisors an option to add equity exposure with built-in downside protection.
Buffered ETFs such as AUGU enable growth while aiming to mitigate losses, appealing to clients who prefer conservative equity exposure without committing entirely to fixed income. Rather than following a strict stock-bond allocation, the AUGU and other buffered ETFs offer advisors a way to add equity exposure with a layer of protection—essentially a “buffer”—to guard against potential losses. The strategy provides growth potential with a reduced downside risk.
Redefining Risk with Buffered ETFs
Buffered ETFs add a protective cushion underneath the S&P 500 index, ensuring that if the market declines, a percentage of losses is absorbed by the ETF itself. “We put a layer of protection underneath the S&P 500,” Grahn explains.
The buffer resets annually, meaning each year begins with a fresh layer of protection that aligns with the account’s current value, allowing clients to build a more resilient asset base over time.
For instance, with AUGU’s 15% buffer, a yearly drop in the S&P 500 of up to 15% won’t impact the investment. When the market climbs, clients participate in those gains fully, subject to a modest cap on returns. Grahn notes, “It’s not technically a floor, but the protection level goes up with the account value,” giving advisors a dependable tool to offer clients equity growth with a safety net.
Buffered ETFs serve clients seeking an alternative to high-risk equity exposure or low-yield fixed income. As Grahn points out, “The buffered ETFs can deliver instant protection but [have] long-term opportunity to grow based on the equity risk and the trajectory of that,” giving advisors a unique advantage when traditional asset allocations fall short of meeting client goals.
Overcoming Fixed-Income Limitations
For investors accustomed to managing equity risk with bonds, buffered ETFs present a fresh opportunity. The AUGU ETF combines the returns of equity exposure with a protective layer, allowing advisors to meet both growth and protection objectives without depending solely on fixed-income assets. Grahn emphasizes, “if you move into a buffered equity, you are fulfilling objective number one, which is protection.”
Buffered ETFs are especially advantageous in a climate where rising interest rates have limited the reliability of bond yields. Unlike fixed income, which offers only limited protection, products such as AUGU can buffer up to 96% of potential market downturns, Grahn says, enabling advisors to craft portfolios that balance predictability with growth. Traditional fixed-income allocations often leave most risk exposure in equities, but buffered ETFs allow advisors to manage that risk while still capturing equity-like returns.
Simplifying Deployment in Client Portfolios
Buffered ETFs may initially seem complex, but Allianz has structured AUGU and similar products for ease of use. Grahn explains that deploying Allianz’s buffered ETFs in practice is straightforward: Advisors can select a quarterly series of four funds, each with 10% or 20% buffers. The setup provides four distinct 12-month outcome periods, diversifying returns across time while ensuring consistent buffer protection. By staggering investments this way, advisors can simplify implementation and offer clients stability against significant market downturns, which Grahn points out is unlikely over prolonged periods.
“The odds of the market being down by 2,000% or more for an extended period of time is not very great,” he says. The diversification across time enables advisors to confidently present buffered ETFs as a core element of their clients’ portfolios, balancing simplicity with robust protection and growth opportunities.
Integrating Buffered ETFs as a Core or Supplementary Asset
The flexibility of buffered ETFs such as AUGU allows advisors to position them as either core or supplementary assets within a portfolio. Depending on clients’ risk tolerance and investment goals, these products can either replace a portion of fixed income or complement traditional equity allocations. “If you think about this as a fixed-income replacement, then it’s the fixed-income allocation, and you leave the core being the S&P,” Grahn notes. “So, 60/40 could be 60 S&P and 40 buffered [ETF].”
Buffered ETFs provide downside protection akin to bonds, but they also deliver growth potential similar to equities, making them an appealing alternative in diversified portfolios. The duality allows advisors to meet their clients’ need for risk-managed equity exposure without relying solely on traditional bonds.
AUGU: The Power of Uncapped Upside with Protection
Among Allianz’s buffered ETFs, AUGU stands out with its unique 15% buffer and uncapped upside potential. Grahn explains that instead of limiting growth by imposing a cap, Allianz’s strategy sacrifices some initial returns to secure gains beyond that threshold.
“Instead of selling the market away above the cap, we sell away the first 3% or 4% of returns,” he says. This design benefits long-term investors by prioritizing substantial growth while preserving downside protection, offering a strong balance between stability and potential asset growth over time.
“This product gives you an opportunity to not just reach up to returns that are capped,” Grahn notes. “This gives you the returns that matter the most over the long term, which will tilt the odds in your favor for not just maintaining your asset base but growing it.”
Practical Considerations: How Advisors Can Implement AUGU in Client Portfolios
As advisors and their clients continue to navigate an uncertain market, products such as Allianz’s AUGU ETF present new, effective options to secure growth without excessive risk. Grahn concludes, “Buffered ETFs are absolutely worth thinking about, especially for investors that are at that point where they say, ‘I can’t be a 100% in equities. What do I do?’”
For advisors seeking an answer to that question, Allianz’s buffered ETFs offer a compelling solution: the opportunity to redefine equity exposure with a level of predictability and protection that meets the demands of today’s investment climate. ETFs like AUGU empower advisors to meet the needs of cautious clients who seek equity exposure without the high volatility often associated with traditional stock investments.
_____________________
Additional Resources
- Contact Allianz Investment Management
- AUGU Fact Sheet
- AUGU Prospectus
- AllianzIM Uncapped Buffered ETFs Product Brief
______________________
Disclosures
The Buffer and Floor ETFs’ investment strategies are different from more typical investment products, and the Funds may be unsuitable for some investors. It is important that investors understand the investment strategy before making an investment. For more information regarding whether an investment in the Funds is right for you, please see the prospectus including “Investor Considerations.”
Investing involves risks. Loss of principal is possible. Investors may lose their entire investment, regardless of when they purchase shares, and even if they hold shares for an entire outcome period. Full extent of caps, spreads, floors and buffers only apply if held for stated outcome period and are not guaranteed. The cap and spread may increase or decrease and may vary significantly after the end of the outcome period.
Investors should consider the investment objectives, risks, charges, and expenses carefully before investing. For a prospectus with this and other information about the Fund, please call 877.429.3837 or visit www. allianzIMetfs.com to review the prospectus. Read the prospectus carefully before investing.
FLEX Options Risk: The Fund will utilize FLEX Options issued and guaranteed for settlement by the Options Clearing Corporation (“OCC”). The Fund bears the risk that the OCC will be unable or unwilling to perform its obligations under the FLEX Options contracts. In the unlikely event that the OCC becomes insolvent or is otherwise unable to meet its settlement obligations, the Fund could suffer significant losses.
FLEX Options are customized equity or index options contracts that trade on an exchange, but provide investors with the ability to customize key contract terms like exercise prices, styles, and expiration dates. An options contract is an agreement between a buyer and seller that gives the purchaser of the option the right, but not the obligation, to buy (in the case of a call option), or to sell (in the case of a put option), a particular asset at a specified future date at an agreed upon price (commonly known as the “strike price”).
The Fund’s website, www.allianzIMetfs.com, provides important Fund information (including outcome period start and end dates and the cap, spread, floor and buffer), as well as information relating to the potential outcomes of an investment in the Fund on a daily basis. If you are contemplating purchasing shares, please visit the website. Investors considering purchasing shares after the outcome period has begun or selling shares prior to the end of the outcome period should visit the website to fully understand potential investment outcomes.
Allianz Investment Management LLC (AllianzIM) is a registered investment adviser and a wholly owned subsidiary of Allianz Life Insurance Company of North America.
Distributed by Foreside Fund Services, LLC. Foreside Fund Services, LLC is not affiliated with Allianz Investment Management LLC or Allianz Life Insurance Company of North America.
