Johan Grahn
Buffered ETFs Explained: Downside Protection
Johan Grahn has spent about 20 years in investment management and asset allocation, starting at a university endowment where he oversaw a complete overhaul of a $250 million portfolio spanning equities, fixed income, hedge funds, real estate, and timber. He later worked as an investment consultant for other endowments and pension plans, then built risk management strategies for a large insurance company based in New York, working with firms on volatility-driven management, risk parity, momentum, and rate overlays. That entire career arc led him to his current role at Allianz Investment Management, where he runs their suite of buffered ETFs.
On this episode, recorded live at the Exchange ETF conference, Johan breaks down how Allianz's buffered ETFs work, the difference between a buffer and a floor, and why an aging population with decreasing risk appetite is driving explosive growth in the defined outcome category.
Buffers, Floors, and How They Work
Allianz offers four distinct defined outcome products. The first two are 12-month and 6-month versions with a 10% buffer, meaning the first 10% of downside is absorbed. The third is a 12-month product with a 20% buffer for deeper protection but a lower cap. The fourth, and newest, is a floor product over six months where the maximum loss is 5% regardless of how far the market falls. All four products reset at the end of their outcome period, giving investors a fresh buffer and new cap at the higher starting price.
Johan walks through the mechanics clearly. Take a 10% buffer with a 20% upside cap over 12 months: if the market drops 10% or less, you keep your entire million dollars. If it drops 11%, you lose 1%. If the market is up 20%, you keep all 20%. If it's up 30%, you cap at 20%. The trade-off is straightforward: you're giving up gains beyond the cap in exchange for downside protection. Deeper buffers mean lower caps.
Under the hood, these are options packages using FLEX options (specifically delta-adjusted FLEX options), which are custom exchange-traded contracts that provide the specificity needed for the outcome structure. The buffer is created by buying an at-the-money put and selling a put out-of-the-money at the buffer level. The cap is created by selling a call option at the cap level. These options are set at inception and held through the outcome period. No active trading is needed during the term, which is part of the product's simplicity.
Daily Liquidity vs. Structured Notes
One of the biggest advantages over structured notes and annuities, Johan emphasizes, is daily liquidity. If you buy a structured note on day one and want out on day 63, you're typically stuck until maturity. With Allianz's ETFs, you can buy or sell any day the market is open. An investor who enters mid-period gets a proportionally adjusted buffer and cap based on the ETF's current price relative to its starting value. This makes the product dramatically more flexible than insurance-based alternatives.
Johan also addresses the pricing question that comes up when buying mid-period. If the ETF started at $100 with a 10% buffer (floor at $90) and a 20% cap ($120), and by day 50 the S&P has risen 5% so the ETF trades at $105, the buffer and cap don't change in dollar terms. Your buffer is still at $90 and your cap at $120. Your risk-reward from a $105 entry point is different from a $100 entry, and Allianz publishes daily metrics so advisors can see exactly what the remaining upside and downside look like at any entry point.
The Demographic Tailwind
Johan connects the growth of defined outcome ETFs to a demographic reality: 10,000-11,000 Americans retire every day. These are people who spent decades accumulating wealth and now need to protect it while still generating returns. For most of their investing lives, the answer was to shift from stocks to bonds as they got older. But the bond market of 2020-2023 showed that strategy has limits. Bonds offered minimal income at the low, then lost 13% in a single year when rates rose.
That experience broke the mental model for many retirees and their advisors. Buffer ETFs offer a defined, quantifiable outcome that an advisor can show a nervous client: "Your worst case over the next 12 months is X, and your best case is Y." That certainty is what's driving adoption, especially among advisors with large books of near-retirees and retirees who experienced the 2022 bond rout firsthand and don't trust fixed income to protect them anymore.
Key Takeaways
- Allianz offers four defined outcome products: 10% buffer (12-month and 6-month), 20% buffer (12-month), and a 5% floor (6-month), all using FLEX options that reset at the end of each outcome period.
- Unlike structured notes, Allianz's buffered ETFs trade daily. Investors can enter or exit any day, with published metrics showing the remaining buffer and cap at the current price.
- The options packages are set at inception and held through the outcome period with no active trading required, which simplifies the product and reduces operational risk.
- About 10,000-11,000 Americans retire daily, and the 2022 bond market crash broke many advisors' confidence in using fixed income alone for downside protection.
- Johan's career spanned endowment management, pension consulting, and insurance company risk management before landing at Allianz, giving him deep experience in every approach to managing portfolio risk.
Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.
Full Transcript
4,834 wordsMachine transcribed from Brad Roth's conversation with Johan Grahn, with speakers identified automatically. Timestamps link to that moment on YouTube. Lightly cleaned, otherwise unedited.
Welcome to Behind the Ticker. I'm Brad Roth, Chief Investment Officer of Thor Financial Technologies and Portfolio Manager of THLV, the Thor Low Volatility ETF. Behind the Ticker uncovers the inner workings of the ETF industry. We will interview portfolio managers and ETF service providers to dive deep into their work lives and their businesses. We will learn the inner workings of their strategies and what drives them as they continue to grow their company. Many of these individuals are entrepreneurs and will have unique and compelling insights to share as much goes on behind the ticker. Please note, nothing in this show is investment advice and it is meant solely for educational and entertainment purposes only.
Welcome to Behind the Ticker. We are still live from the Exchange ETF Conference and today we are joined by Johan Grahn. He is with Allianz and they have a big suite of buffered ETF products. This was the first time getting education, for me at least, on buffered products and I thought Johan did a great job of explaining them. There are many different use cases I think you'll be able to find for these products inside of your overall model portfolio construction or even as a standalone. So without
Further ado, please welcome Mr. Johan Grahn. Hey Johan, welcome to the show. Thanks for having me. It's my pleasure.
So can you tell us a little bit about your background and how you ended up in the position you are today?
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Sure, yeah. It's a longer backdrop perhaps, but I've been in the investment asset management side of the business for, a good 20 years. So a lot of what I've been doing has to do with portfolio and management and asset allocation and mixing and matching and building different types of risk profiles. And I've been doing that in different capacities. Started out after college working for a university endowment fund and was very fortunate to be closely aligned with the consulting firm at that time that was helping us to turn the whole thing around from where it was. But I saw basically a complete do over of a $250 million portfolio getting across, equities, fixed income, hedge funds, real estate, timber, the whole thing. So that was my like kind
Of where I cut my teeth on this industry. And after that, I joined a consulting firm. So that was kind of a natural progression for me. And then I helped other endowments and foundations and pension plans to build and manage their asset portfolios, manager selection, the whole thing. And my next step in the natural progression, if you will, also now I ended up building portfolios for a big insurance company based out of New York. And we put together, all kinds of risk managed type of strategies. And I got to work with asset managers, some of the best in the world, I would argue, both in the US and some of them in Europe to construct, some of this was volatility driven management and some of it
Was risk parity based, momentum based, rate overlays, you name it. It got pretty complicated at the end of the day. Great experience, though. So I learned a lot about how to like squeeze the most amount of return that you can out of the least amount of risk that you take, right? And I'm only mentioning all of this because it's going to lead into where we're at today in the position that I have, working with ETFs for Allianz Investment Management. We launched a series of buffered ETFs or defined outcome ETFs. And it's a very clean way to get exposure to a risk managed product in a very transparent way that can help you build confidence into what you do on the investment side. So maybe a bit of a long story
There. But that's kind of the backdrop to why I love what I do today. it's all fits really nicely into how you can manage money.
Yeah, you and I are very similar in the fact that trying to squeeze the most possible return out of the least amount of risk. We can probably talk about it a little bit later about, that the benefits of low volatility and what that can do over the long term. But before we get too deep into the business stuff, I always like to ask, what are some of the hobbies you have or things you like to do outside the office when you're not working?
Yeah, so it's changed over the years, as you can imagine. So like many on your show, I have kids. And right now, well, right now, there's three. Full stop. But they're all in sports, ranging from 11 to 14 and 15 year old. And so I spend a lot of time outside of work, going to soccer games and volleyball and, that kind of stuff. And the weekends are kind of packed up. So I love that part of it. But on a personal level, I have a couple of hobbies. one is involving smoking, smoking meat, that is. So I have a thousand pound smoker custom built, and I spend a lot of time on that when I can. It's kind of the backyard, kind of, you know,
Everybody knows dad is home, he's busy with the smoker, kind of builds the whole family around that one thing. And I've also started to get back into nature in a different way than I that I have been able to over many years. And I like to go out and do backcountry backpacking. So I take, between four and six days, kind of cut out, rely on my GPS signal to for communication purposes and spend some time in environments where I get to think more about, the next step and have a different viewpoint and clear out my head. After, busy, busy, busy days in the office, so to speak. So I love that and look for that challenge where I
Tell my wife, it's a 50-50, I'll make it. But it doesn't mean that it's a 50-50, I'm going to make it back home. It's just like, trying to find that next challenge.
Yeah. And that's, especially you and I were just joking, you're a two-phoner. I used to be a two-phoner. It's like, you need those days. Like you need to go out and just clear your mind and like reset a little bit. And I'm sure that's helpful. And also I'm deep into the sports as well. I spend more time thinking about you seven girls soccer than I probably should, but it's fun. I enjoy. But let's talk about Allianz. It's a longstanding company, many different product channels. Can you talk about the firm as a whole and how they're out there helping clients?
Yeah. So it's fully focused on risk management and it's the way that the firm has been built. So Allianz Investment Management is wholly owned by Allianz Life based out of Minneapolis. And as an organization, Allianz Investment Management has been managing the risk that comes with issuing insurance types of products. So we've been making promises to people for many decades. And to deliver on those promises, you have to manage risk accordingly. So everything that the team has been built to do is to make sure that whatever outcome or guarantee that we've been promising people, we're delivering on. So the whole trading desk, the portfolio managers, the quants, they've all been trained to deliver different outcomes. But this is, of course, before we went into the ETF space. So we've been in
The ETF space now since the mid 2020. And so we're relatively new to the ETF space. But what we're doing under the hood, so to speak, is something we've done for a very long time. And it fits very nicely with the value proposition that we have as an organization. It fits really nicely with the long term strategy. We speak the same language across multiple disciplines. So it's a very natural progression of what we've done for a long time, just now in a liquid wrapper in the ETF wrapper.
Sure. Yeah. And before we get into the suite, I read on the website, and I agree, I agree with this opinion is that investor risk appetite is decreasing. And what is it about the market over the last, 20 years or last 15 years that has brought about this decreased level of risk appetite or being nervous about volatility?
So I think there might be a few things going on. first of all, you have an aging population. So you have a natural drift towards, being less aggressive with your money. You have 10 or 11,000 people every day that are retiring. And you have that many people thinking about, what does this mean for my investments and the money that I've made, I would like to keep it, and how do I keep it, maybe, maybe not by going all the way out on the risk spectrum, but maybe by dialing back. And these are also individuals that have been living through for the majority of their time, a really, really good place for the bond market,
When it comes to both income and total return. That obviously was washed away with the Fed cutting rates a few years back. And even though there is some a little bit more juice on the fixed income side right now, there's not a ton. Let's be real, like rates at 5%, you still have to pay taxes on the income and so on and so forth. So it's not a ton of juice on the fixed income side. And that comes to my third point, which is, as you have in the past, it's been very simple to move assets from equities to bonds, as you become more conservative. Now you have more people again, as I mentioned, retiring, and that will continue for quite some time. They're now asking
Themselves whether it makes sense to move from equities to fixed income or something different. So there's a big conversation around that topic alone. So I would say more people retiring, the market environment has changed, but the problems are the same. So it requires a different type of solution-minded set to figure that out, I think.
Yeah. And also, I think investors, in my opinion, I work with a lot of investment advisors. I'm sure you talk to a lot of RIAs or financial advisors. And investors want to beat the S&P, but as soon as volatility starts to rear its ugly head, they want to hit the sell button. And so I think as we start to talk about your buffered ETFs, I think they're going to do a really great job of providing a solution that can give them some defined outcome. So let's talk about buffered ETFs. First, what are they trying to accomplish at like a very high level?
Yeah. So very high level, I'll just use an example. Let's say you put a million dollars into one of our ETFs and it comes with a 10% buffer over a 12-month outcome period. So if the market is down by 10% or less, you still keep your million dollars at the end of this outcome period net of fees. If the market is up, well, it can only, the buffer isn't free. So what we do, we have a cap on in terms of how much you can make over that same 12-month outcome period. And if that cap is, 17 or 18% and the market is up 18%, you get to keep all of that. So you get to participate in those returns. If the market is up 30, you still get capped out at 18, let's say.
Same thing is true if the market goes down. If it's down by 10% or less, you get to keep the million dollars. But if the market is down, let's say 11% or 12%, then you lose one or two. So anything after that 10% buffer is depleted, you start participating in the downside. So that's one of the products. Then we have a 20% buffer that works exactly the same way, deeper buffer, lower cap. And then we have a six-month product with a 10% buffer. Works exactly the same way. The only difference is that it's over six months instead of 12. Finally, we just launched a floor product. Works the same way, also over six months as the six-month product. But instead of having a buffer, it's a floor. So you can lose no more than 5% over that six-month period. And then you have a cap
In terms of how much you can make on the upside. So it provides a very specific, defined outcome, hence the name, around what you can expect from that investment.
Yeah. I want to get into the series and how to navigate the series. But before we do that, how do they operate to achieve the investment objectives? What holdings can investors anticipate inside of one of these funds to achieve the goal?
Sure. Yeah. So it can be a long, complicated conversation, or it can be a simple one. But effectively, we're buying an options package to structure this, which is why we know exactly what to expect from these ETFs over the course of the outcome period. By the way, when the outcome period ends, we just reset it so that if the market is up, you get to reset at a higher level and get the buffer to actually ratchet up with you. But in terms of the underlying, it's an options package. We have a put spread that sets the buffer itself. Technically, or more specifically, you buy a put at the money and you sell one out of the money at 10% or 20%. And then to fund that buffer,
You sell a cap on the upside. That's effectively what's creating that. And if you take it one layer down into the tech spec, we're using flex options. So more specifically, delta adjusted flex options, which gives us the specificity that we need, the custom exchange traded options contract, fully liquid, that we use to execute the actual options package, if you will.
So does the options package have to be traded at all during the term? Or are you setting trades with the expected outcome? Let's say it's a six month, right? You setting the trades and letting them sit? Or is there work that needs to be done in between the period?
So that's part of the beauty of this, right? So the options contracts that we put in place are the same. So we buy more or less of them. So if we have create activity or redeem activity in the ETF, we're buying the same options package. The beauty for the investor, one of the really cool things is that we buy it on day one. But you as an investor, you can buy it on day two, three, 16 or 48, whatever day, whatever day that looks attractive to you, because it's daily trading. So if you compare it to an illiquid structure that has also been around for your while those structures have been around for decades. If you're not in it on day one, you're not getting in on day
Two. And if you're in on day one, you're not getting out on day 63, you're waiting till the very end. This is a free look into a structure that you can buy and sell whenever it fits your profile,
Your risk profile. Yeah. So if you're buying it on, let's say, day 50, does your cap and floor change or your buffer change? Is that a moving target? Or if I'm getting in, like I said, if I'm getting on day 50, does my floor change at all? Or is it still, let's say it's a 10% floor?
Yeah. So the price of the ETF will move. So it's easier to think about day one and then fast forward, I think. So day one, let's say you put $100 in and your buffer is 10%. Well, the buffer is then at $90 is when the buffer runs out. And let's say the cap for simple math is 20%. That's high, right? But you can make up to $20, right? Day 50, things may have shifted. The price of the ETF might be closer to the cap because the market's gone up. So maybe it's already up by 5%. That means you can lose 5% if the market goes down before you hit that buffer because the buffer is at 100.
Got it. So that makes a ton of sense. So let's talk about the lineup as a whole. There's a different series, there's different types, and there's different outcomes, right? And you also kind of went into the difference between a buffer and a floor. Can you kind of walk through? I know you did it briefly. Can you kind of walk through the entire series, the different types of ETFs that you guys are offering?
Yeah. So we have the 10% and the 20% buffer with 12-month outcome periods. And it's on the S&P 500. I don't think I mentioned that before, but it's on the S&P 500. The SPY ETF is the underlying reference asset more specifically. So we have those two series, and we have the six-month series with a 10% buffer. And we have a six-month series coming out. We just started launching this with a floor and the 5% floor, which is a hard floor. So if the market's down 5%, you lose the whole five. But if the market is down 10, you lose five. If the market is down 60, you only lose five. So you can sleep pretty well at night if you're risk-averse and you like that trade-off.
That's at a high level. And then we have, of each one of these series, we're building it out so that you can access an ETF when you need it. And what I mean is that for the 10% buffer, for example, over a 12-month outcome period, we have 12 versions of it. So one for each month of the year. So if you want to invest in March or April or in October, there is an ETF for you to get into if you want those starting parameters, the day one parameters. And it also gives you an opportunity to diversify across different time periods. So think about a more conservative investor. Let's say I like the 20% buffer, let's say.
It gives me protection on the downside to the tune of 20%. So the market has to be down by 20% or more before you lose any money. It happens. It doesn't happen very often. But when it does, you start losing. If it's down 22, you lost two. Now, if you want to be even building in even more of a safety, so to speak, in a portfolio like that, you might buy four of those ETFs. Now you have diversification across four different time periods. And the odds of the market being down by 20% or more across four different annualized time periods is even smaller. And if it is down in one of those periods, you're actually, from a portfolio level point of view, it's only a quarter instead of the
Full portfolio, so to speak. That's down.
So does an investor need to understand when to roll these products? just making it simple, if I buy a January buffer, it'll automatically reset next January? Or do they need to
Roll it into a new product? No, it resets automatically. So you can hold them indefinitely like any ETF. And that's part of the beauty. So one of the cool things is that if you buy a buffer ETF and the market goes up, mostly it does. So give or take seven out of 10 times on an annualized basis, the market's up. So odds are you're going to have some gains in your portfolio. But since it's an ETF, you don't have to realize the gains. You don't have to pay taxes on them unless you sell the ETF, right? So when the ETF reaches the end of the outcome period, let's say you made 10%. Your million dollars is now worth 1.1 million. It rolls into the next outcome period. You get a new cap. And the cap will vary depending
On market environments. But let's say that you can, if the market goes up another 10%, let's say you get to keep that too the following year. But the neat thing too is that the buffer underneath of your investment is also going up as the account value is going up.
So if I'm an RIA and I've got a regular client list and I'm building model portfolios, how are you using these ETFs? Are you using them as part of an overall model portfolio? Are you adding it to maybe your large cap equity exposure as a little bit of a satellite? Or I can see instances where somebody might want these holistically.
Yeah. Yeah. And you're right. the, the, the spectrum of opportunity for how to use these types of ETFs is extraordinary. I don't think there's any other way to put it because you can, you can decide if you want to just shave a little bit of risk away from your equity, your pure equity position, as you're becoming a little bit more conservative, you can say, you know what, I'm going to take 10% of that 60 or 70% allocation and move it into a buffer ETF. You're taking some risk off the table. That's fine. On the other side, you can say, I want to add risk to my portfolio and I have all this fixed income in my portfolio. That's not giving me really what I'm looking for. So you can take a chunk of that and put that into a buffered ETF.
We see a lot of assets coming from fixed income into our 20% buffer, for example. You can also look at this and say, you know what, those alternatives that I have in my portfolio for diversification benefits. They may or may not come true, but if I replace them with a buffer, I know exactly what to expect. And the really neat thing here that we, I don't think we talk enough about this, but if you think about why you are diversifying a portfolio to begin with, why do you have fixed income in there? 60, 40, everybody, everybody quote unquote, right? 60, 40, that seems to be the going rate, right? Like 60, 40, 70, 30, 80, 20, either one of those allocations, the vast 80, 90% of the risk is coming from equities. That's your risk, no matter what the
Other half of the portfolio is. So right now, if you think equities and fixed income, okay, fixed income, it may or may not give you that buffer that you're looking for from it, but you don't need it unless the equity markets are going down. There's no real strong reason to own a sliver of income stream if you can't rely on the diversification benefits from that sleeve to fixed income. So if you're looking for diversification, you have an opportunity to build in a buffered ETF. And what happens here is that now you have two things going on, three, actually, three. Number one, you have exposure to the equity markets because over the long run, they tend to go up. So assuming you still think that the economy is going to do all right
Over the longer term, let's say you have a 10-year investment horizon or 20 years, you want to have exposure to the equity risk premium. If you like the volatility aspects of fixed income, for example, a 20% buffer will give you lower volatility, but it will also give you positive correlation when markets go up. So when you don't need that free lunch correlation that everybody's been reading about in the MPT stats and the Monte Carlo simulations and every textbook about finance and investing, you don't really need the correlation benefits unless the markets are working against you. Mostly they don't work against you. Mostly they work for you. In a buffer ETF, you have positive correlation when that is the case. And then as markets start coming down,
Equity markets start coming down, you are decreasing the correlation in the buffer allocation closer and closer to zero. If you're in the floor product, once you hit the floor, you have zero correlation exactly when you want it. So you can think about this in so many different ways. But to answer your question, like how do we see this being implemented? It is literally all over the place. And what I mentioned are some of the use cases and then it can get into the technical
Aspects and it's all over the place. Right. I would even think sitting here, this could completely almost delete the entire variable annuity market as well. people like the guaranteed income stream, but it's the same idea. And this is a liquid investment that doesn't have lock up periods. I can see many, many use cases. Are you seeing any advisors that are using these in lieu of maybe somebody wanting an annuity and telling that story instead?
So as we were launching these or getting ready to launch buffered ETFs, coming from an insurance shop with annuities, do you have to take my word for this? We looked at that very, very, very carefully to find out if there was any type of cannibalization and to make a very long story, very long, painful exploration story short for you. The Venn diagram of the use cases between those investors and advisors that either buy or use annuities and those that look at the wealth management side and buy ETFs in this case, the Venn diagram and the overlap where the decision is questionable as to whether you would want to buy an annuity or a buffered ETF, very small, very, very little overlap. But intuitively, it makes sense to go down that path that you just did. And there's been articles written about this
In the past too, that frankly, it's been disproven over time. So it's not a replacement. The thing that you can do on the insurance side that you can't do in a liquid wrapper is the fact that you have assets coming in that you can invest on the back end. And as long as you have a long enough period to invest, you can always create more attractive outcomes over time. But they are different in terms of liquidity and longevity and fees and a few other things, right? But the use cases remain different.
So, and I'm sure you guys are working really hard on this. But how are you looking at getting these implemented inside of, the 401k and retirement space? This seems like a retiree's dream.
Yes, I'll steal a quote that I heard from somebody else in the media space. They called it retirement, retiree candy, I think, which I thought was clever, because it makes a lot of sense. Now, is it available broadly enough to just be popped into a 401k? No. Is that something that we're curious about and are looking into? For sure. Yeah. Yeah.
So this was awesome and very interesting. I'm really excited that we had you on. I think people are going to find it interesting. But before I let you go, where can people learn more about you
And the Allianz Buffer ETF lineup? So you can go to bufferedetfs.com or you can go to allianzim.com. Allianzim.com. And I think one of the, there's some information on the website, a short video, a couple of pamphlets that you can read if you want to read. There's also a product table that I would encourage anyone to look at. And you can click on any of the tickers, you can sort by caps and buffers, time periods. And when you click on a ticker, you get to, if you scroll down, you can see a graph for exactly how that fund is trading relative to the cap and buffer. And that gives you a really nice visual of what you can expect when you're
Buying it as well or selling. Well, again, thank you so much for joining me. And I hope you enjoy the rest of your week. Thank you so much. My pleasure. Thank you.
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