Just at a first cut, the thing you need to explain is why you want this particular payout function.
I think you are too intrigued by understanding the mechanics of the options, and haven't expressed a clear understanding of why you want the particular thing that this fund does.
Because of the "quarterly" aspects, as you say it is quite hard to understand what this fund does do. Relying on your own analysis, you say
Back in 2020 I tried to understand how PJUL worked, which was a US stock "Innovator Power Buffer" product, and created this chart. Each dot represents the actual return of the S&P-500-and-predecessors for the years 1926 through 2019, to give an visual impression of how often the buffer and cap cut in and have an effect.
I'm not going to try to redo this for BUFY, I just want to show schematically what typical payout function looks like and how it lines up with the stock history. Obviously for BUFY you'd need statistics for international stocks and some really complicated stuff to deal with the layering of quarterly portfolios.
![Image]()
The point is that to me the times when it is doing something favorable are only when the stock market is behaving in a tame fashion, which is not when I want protections. The downside action is exactly the opposite of what I want. Anyone who invests in the stock market ought to be OK with a -15% decline. It's the extreme times when the decline is more than that that you want protection.
The buffered ETFs give you a fixed slug of protection and no more. It's easy enough to say "well, if the stock market falls -50%, it is obviously better to have a 15% protected than nothing," but it's still not too satisfying. It's still at -35% decline, and if you had just been holding a 60/40 stock/bond portfolio like VBIAX, your [url=maximum decline in 2008-2009[/url] would have been -35.89%.
On the other hand, I believe that many investors do not understand the importance of the extremely good years in long-term stock returns, and underestimate the effect of the caps in a buffered product. To be sure, a 30% cap if that's what it really is is a high one.
In brief, a payout function like those provided by buffered ETFs provides an overall average slope of less than 1, flattening the highs and the lows, while simply adding a Treasury bill allocation gives you a linear payout function that also flattens the highs and the lows... and a bond allocation does something similar but better.
So in considering a buffered product, remembering that there's no magic and they pay for partially protecting the downside by cutting off some of the upside--with high expenses and losing the dividends... what you need to judge is:
a) In what scenarios... how often... will the buffered product do something really valuable?
b) What are your personal values, your "utility" function, for preferring the first -15% of a decline to be protected and no incremental protection afterwards, versus just a lower stock allocation to get partial protection all the way down? What do you like about the downside performance of BUFY that is better than that of 60% VXUS, 40% BNDX?
c) Do you have some reason for predicting that international stocks are going to show behavior over the next few years that will be favorable for using this product?
Anyway, just for laughs, I haven't done this, but here is the actual past performance of BUFY compared to 60% VXUS, 40% BNDX.
I think you are too intrigued by understanding the mechanics of the options, and haven't expressed a clear understanding of why you want the particular thing that this fund does.
Because of the "quarterly" aspects, as you say it is quite hard to understand what this fund does do. Relying on your own analysis, you say
Just for the sake of discussion, let's say there was a nice, clean one-year outcome period, a 15% downside buffer, and a 30% upside cap.There is no question that the upside is capped (perhaps by 30% or so) but the downside is limited by 15-18%.
Back in 2020 I tried to understand how PJUL worked, which was a US stock "Innovator Power Buffer" product, and created this chart. Each dot represents the actual return of the S&P-500-and-predecessors for the years 1926 through 2019, to give an visual impression of how often the buffer and cap cut in and have an effect.
I'm not going to try to redo this for BUFY, I just want to show schematically what typical payout function looks like and how it lines up with the stock history. Obviously for BUFY you'd need statistics for international stocks and some really complicated stuff to deal with the layering of quarterly portfolios.
The point is that to me the times when it is doing something favorable are only when the stock market is behaving in a tame fashion, which is not when I want protections. The downside action is exactly the opposite of what I want. Anyone who invests in the stock market ought to be OK with a -15% decline. It's the extreme times when the decline is more than that that you want protection.
The buffered ETFs give you a fixed slug of protection and no more. It's easy enough to say "well, if the stock market falls -50%, it is obviously better to have a 15% protected than nothing," but it's still not too satisfying. It's still at -35% decline, and if you had just been holding a 60/40 stock/bond portfolio like VBIAX, your [url=maximum decline in 2008-2009[/url] would have been -35.89%.
On the other hand, I believe that many investors do not understand the importance of the extremely good years in long-term stock returns, and underestimate the effect of the caps in a buffered product. To be sure, a 30% cap if that's what it really is is a high one.
In brief, a payout function like those provided by buffered ETFs provides an overall average slope of less than 1, flattening the highs and the lows, while simply adding a Treasury bill allocation gives you a linear payout function that also flattens the highs and the lows... and a bond allocation does something similar but better.
So in considering a buffered product, remembering that there's no magic and they pay for partially protecting the downside by cutting off some of the upside--with high expenses and losing the dividends... what you need to judge is:
a) In what scenarios... how often... will the buffered product do something really valuable?
b) What are your personal values, your "utility" function, for preferring the first -15% of a decline to be protected and no incremental protection afterwards, versus just a lower stock allocation to get partial protection all the way down? What do you like about the downside performance of BUFY that is better than that of 60% VXUS, 40% BNDX?
c) Do you have some reason for predicting that international stocks are going to show behavior over the next few years that will be favorable for using this product?
Anyway, just for laughs, I haven't done this, but here is the actual past performance of BUFY compared to 60% VXUS, 40% BNDX.
Statistics: Posted by nisiprius — Fri Dec 26, 2025 7:15 am — Replies 8 — Views 417