In the dynamic world of finance and investment, the adage "it's not how much you make, but how much you keep" stands as a fundamental principle guiding savvy investors. While many focus solely on maximizing returns, seasoned investors understand that protecting capital and minimizing losses are equally—if not more—important. This approach emphasizes strategies that prioritize capital preservation, downside protection, and tax efficiency. One effective tool in achieving these objectives is the use of Buffered ETFs, complemented by a keen understanding of tax benefits.
The Importance of Capital Preservation
In the pursuit of wealth accumulation, investors often chase high returns without fully considering the associated risks. However, market volatility and unforeseen downturns can erode gains quickly, leaving portfolios vulnerable to significant losses. Recognizing this, investors are increasingly turning to strategies that prioritize capital preservation.
Buffered ETFs, a relatively new financial instrument, offer a compelling solution. These ETFs provide investors with exposure to a specific market index while limiting downside risk through built-in buffers. For instance, a Buffered ETF might offer investors protection against the first 10% of losses in the underlying index while allowing participation in its gains beyond that threshold. This downside protection can be invaluable during periods of market turbulence, providing investors with peace of mind and reducing the impact of market downturns on their portfolios.
Buffered ETFs: Mitigating Downside Risk
Buffered ETFs are designed to provide investors with a level of downside protection, making them particularly attractive for risk-averse investors or those seeking to preserve capital in volatile market conditions. By capping potential losses, these ETFs enable investors to stay invested with confidence, knowing that their downside risk is limited.
Moreover, Buffered ETFs offer flexibility and transparency, as investors can easily track the performance of the underlying index and monitor the effectiveness of the downside protection mechanism. This transparency fosters trust and allows investors to make informed decisions based on their risk tolerance and investment objectives.
Tax Benefits: Keeping More of What You Make
In addition to downside protection, investors must also consider the tax implications of their investment decisions. Utilizing investments like tax free municipal bonds may have a place in high income investor portfolios. Evaluating the after tax return versus the tax free return on an investment is an effective way to determine which investment makes most sense.
General Firm Disclosure: “The Pitti Group Wealth Management, LLC (“The Pitti Group”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where The Pitti Group and its representatives are properly licensed or exempt from licensure.”
Informational Disclosure: “The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.”
Tax (Not Advice) Disclosure: “This information is general in nature and should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation.”
Additional Information Disclosure: “For additional information, please visit our website at https://www.thepittigroup.com/.”
General Risk Disclosure: “No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of The Pitti Group strategies are disclosed in the publicly available Form ADV Part 2A.”
Buffered ETFs Disclosure: “An investor that purchases Units of a Structured Outcome ETF other than at starting NAV on the first day of a Target Outcome Period and/or sells Units of a Structured Outcome ETF prior to the end of a Target Outcome Period may experience results that are very different from the target outcomes sought by the Structured Outcome ETF for that Target Outcome Period. Both the cap and, where applicable, the buffer are fixed levels that are calculated in relation to the market price of the applicable Reference ETF and a Structured Outcome ETF’s NAV (as Structured herein) at the start of each Target Outcome Period. As the market price of the applicable Reference ETF and the Structured Outcome ETF’s NAV will change over the Target Outcome Period, an investor acquiring Units of a Structured Outcome ETF after the start of a Target Outcome Period will likely have a different return potential than an investor who purchased Units of a Structured Outcome ETF at the start of the Target Outcome Period. This is because while the cap and, as applicable, the buffer for the Target Outcome Period are fixed levels that remain constant throughout the Target Outcome Period, an investor purchasing Units of a Structured Outcome ETF at market value during the Target Outcome Period likely purchase Units of a Structured Outcome ETF at a market price that is different from the Structured Outcome ETF’s NAV at the start of the Target Outcome Period (i.e., the NAV that the cap and, as applicable, the buffer reference). In addition, the market price of the applicable Reference ETF is likely to be different from the price of that Reference ETF at the start of the Target Outcome Period. To achieve the intended target outcomes sought by a Structured Outcome ETF for a Target Outcome Period, an investor must hold Units of the Structured Outcome ETF for that entire Target Outcome Period.”
