How does a buffered product work in a down market?​

In a down market (when underlying stock prices are falling), a buffered product is designed to protect investors from experiencing the full extent of the losses. This is where the “buffer” comes into play.

Here’s how it works: 

If a traditional ETF declines 20%, the investor would lose 20% (plus fees). But with a buffered ETF that includes a 50% buffer, the investor would only lose about 10%, because the product is structured to absorb the first half of that drop.

This protection is created using put options, which increase in value when the market goes down. These options give the fund the right to sell at higher prices, offsetting some of the losses in the underlying investment. 

In a down market: 

• Investors don’t avoid all losses. 

• Investor loss is reduced, often by a specific percentage (in the case of the ARK Defined Innovation Exposure Term ETFs (“ARK DIET”), 50% of the market decline). 

• The buffer resets every 12 months, so it applies for one outcome period.