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Examining Buffered Investments
Buffered investments are structured to allow investors to participate in market growth (sometimes capped), with a buffer. It is vital investors fully understand the benefits and complexities of each individual investment and the associated risks prior to investing.
Expand the rows below to view explanations for three types of buffered investments.
DEFINITION
RELATED PRODUCT NAMES1
PRODUCT TYPE
TERM
PARTICIPATION RATE
PRINCIPAL PROTECTION
PERIODIC PAYMENTS
RATE OF RETURN
CHARGES/FEES
LIQUIDITY
CREDIT RISK
TAX-DEFERRED ACCUMULATION3
DEATH BENEFITS
EARLY WITHDRAWAL PENALTIES
HOW TO PURCHASE
1Related Product Names refer to terms used by insurance carriers, ETF sponsors, and structured product issuers. Individual products will vary.
2Buffered Notes should be considered buy-and-hold investments and may not be appropriate for investors who cannot hold them to maturity as they are not traded on an exchange, and there may be little to no secondary market available.
3Any discussion of taxes is for general informational purposes only. This content should not be considered complete and does not cover individual situations and circumstances. Neither AAM, nor its affiliates and employees provide tax advice and investors should consult their tax advisor before investing in any annuity, ETF, or structured product.
4Due to the underlying derivative positions, calculating an account value for a Buffer Annuity on any day prior to maturity can be very complicated and may be subject to a variety of conditions and risks. Generally, each contract has a provision which allows policyholders to withdraw a portion of their account value without incurring a withdrawal fee; however, this varies by product.
The information contained herein is not intended to be a complete description of the terms, risks, and benefits associated with any specific Buffer Annuity, Buffered ETF, or Buffered Note offering. None of these investments are fully principal protected and therefore investors may receive less than their initial investment at maturity. This report is for informational purposes only, does not pertain to any security product or service, and is not an offer or solicitation of an offer to buy or sell any product or service. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her advisor.
Buffer Annuities are more complex than traditional variable annuities. The principal protection offered by the buffer may not compensate for the expected value lost due to the cap on potential upside gains. As with any investment vehicle, Buffer Annuities are subject to risk, including possible loss of principal. Investment returns and principal will fluctuate with market conditions so that contract values, upon distribution, may be worth more or less than the original investment.
Buffer Annuities include certain contractual guarantees which are subject to the creditworthiness of the insurance company providing the annuity. The insurance company’s creditworthiness is an important consideration in evaluating a Buffer Annuity.
Buffered Exchange Traded Funds (ETFs) seek to generate returns that match the price return of an index, generally up to an upside return cap (a “Cap”) on potential upside returns, while limiting downside losses. See an individual ETF’s offering documents for information regarding an ETF’s upside cap. There is no guarantee Buffered ETFs will achieve their investment objectives. Buffered ETFs have characteristics unlike other traditional investment products and may not be suitable for all investors. Any potential buffer protection the fund seeks to achieve is based on the investor remaining invested during the entire outcome period.
Investing in Buffered ETFs involves risks. Buffered ETFs face numerous market trading risks, including active markets risk, authorized participation concentration risk, buffered loss risk, cap change risk, capped upside return risk, correlation risk, FLEX Option counterparty risk, cyber security risk, fluctuation of net asset value risk, investment objective risk, limitations of intraday indicative value risk, liquidity risk, management risk, market maker risk, market risk, non-diversification risk, operation risk, options risk, outcome period risk, tax risk, trading issues risk, upside participation risk and valuation risk. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. ETFs are bought and sold at market price and not individually redeemed from the fund. Brokerage commissions will reduce returns.
Buffered ETF shareholders are generally subject to a Cap that represents the maximum percentage return an investor can achieve from an investment in the ETFs’ for stated outcome periods, before fees and expenses. If an outcome period has begun and a Buffered ETF has increased in value to a level near to its Cap, an investor purchasing at that price has little or no ability to achieve gains but remains vulnerable to downside risks. Additionally, a Cap may rise or fall from one outcome period to the next. A Cap, and an ETF’s position relative to it, should be considered before investing in the ETF.
Buffered ETFs only seek to provide shareholders that hold shares for the entire outcome period with their respective buffer level against Index losses during the outcome period. An investor will bear all index losses exceeding the stated buffer level. Shares purchased after the outcome period has begun or sold prior to the outcome period’s conclusion, may experience investment returns very different from those that a Buffered ETF seeks to provide. Depending upon market conditions at the time of purchase, a shareholder that purchases shares after the outcome period has begun may also lose their entire investment. For instance, if the outcome period has begun and the Buffered ETF has decreased in value beyond the predetermined buffer, an investor purchasing shares at that price may not benefit from the buffer. Similarly, if the outcome period has begun and the Buffered ETF has increased in value, an investor purchasing shares at that price may not benefit from the buffer until the ETF’s value has decreased to its value at the commencement of the outcome period.
Buffered Notes are considered complex and may not be suitable for all investors. Buffered Notes are sold only by prospectus and investors should read the prospectus and pricing supplement carefully before investing as they contain a detailed explanation of the risks, tax treatment, and other relevant information about the investment. Investors should consult accounting, legal, or tax professionals before investing. Structured products are sold through financial professionals.
Buffered Notes are unsecured obligations of the issuer, and therefore subject to risk of default. The issuer’s creditworthiness is an important consideration in evaluating a structured product. Typically, the issuer of a Structured Product maintains a secondary market; however, there is no obligation to do so.