Market Value of Buffered ETF's in Brokerage Acct

Discussion in 'ETFs' started by hayman, Jul 17, 2021.

  1. hayman


    Hi all,

    With the equity markets having ripped upward to extreme levels the last year+, I want to invest in some Buffered ETF's in my 401K and IRA accounts. For those not familiar with them, there are varying types that allow for x% downward buffer, with a corollary y% upward cap, for a given year. For example, Allianz ticker AZAL has a 10% downward buffer (you don't get assessed the first 10% of a downward move), and has a corollary 15% upward cap (so, if market rips anther 30%, your gain is capped at 15%). The price action on these ETF's is like any other ETF (in this case goes up/down along with S&P index), and you can buy/sell these ETF's, at any time above/below the initial inception purchase price, with adjustments made to buffers/caps accordingly, based on your purchase price relative to the inception price.

    I have my 401/IRA's in a TD Ameritrade acct, and want to purchase these instruments in these accts.

    My question is do brokerages understand the math behind these ETF's, and do they truly calculate the market value (inclusive of caps and buffers) for these instruments at any point in time? If not, when/how is the market value actually calculated when you sell after a purchase?

    Thanks in advance for anyone who has this figured out.
    murray t turtle likes this.
  2. Sig


    At least for AZAL the buffer period is not based on when you purchase the fund. It resets every so many days on a rolling schedule, so you may buy I already at it's cap, for example, when you buy it and may reset in 168 days. Scroll to the bottom of to see exactly where it stands now.

    Seems like something you'd have to pretty activity manage, and since it's an ETF with those funky rules and resets I imagine you'd have to do some modeling to see what the current fair discount to NAV was. In the example above, if you were already at the max value and had a long way to go before the reset, obviously no one is going to pay NAV for something with zero upside and a bunch of potential downside.

    I'm thinking you could replicate this much easier and cleaner by selling calls on an index you own?
    murray t turtle and hayman like this.
  3. Azal.png

    To replicate Azal with Spy:
    Buy 0.06475 SPY (i.e. 27.77/428.85 , 428.85 being the close of SPY on June 30, 2021)
    Buy 0.06475 June 30, 2022 SPY put spread: strike 1 = 428.85 strike 2 =428.85x(1-0.0926)
    Sell 0.06475 June 30, 2022 SPY call: strike = 428.85x1.0996
    Sig and hayman like this.
  4. hayman


    For those interested, I got the answer to my question. The NAV for these Buffered ETF's are not a function of the index they track (SPX, in my example), but rather a function of the options bought and sold during the entirety of the outcome period (in example above, 1 year).
  5. Two remarks:
    1. Options are a function of the underlying.
    2. The underlying itself can be replicated with a strike 0 call.

    Hence Azal can be replicated roughly by 2 option spreads:
    Long 1-year 0%-110% SPY call spread
    Long 1-year 100%-90% SPY put spread
    hayman likes this.
  6. %%
    YES+ its visible on on a one chart, looks ok, not that most years are as as shallow pullbacks as 2021. AlliZ does the math AMTD just executes it. I haven't read that prospectus, sure would not do it, until i had; but most leveraged ETFs are, for example balanced every day.
    ME, i would want to see it on the charts with benchmark doing a 20% down move.
    YOU most likely noticed the very low volume gives scattergun type pattern??I've traded that scattergun pattern/ but upside is not limited to your exampleETF. Good dividend.[EDIT i see they do it by quarterly resets , sorry i dont have time right now to explore the 20% buffer....]