Welcome to ETF IQ, a weekly newsletter dedicated to the $14 trillion global ETF industry. I'm Bloomberg News reporter and anchor Katie Greifeld.

The Case Against

We did something fun on the Bloomberg Television version of ETF IQ this week: we invited AQR Capital Management and BlackRock to join us to present both sides of the argument brewing over the buffer ETF boom.

To recap, AQR published a fiery critique of buffer products — funds that use a mix of options to protect against a certain amount of downside in exchange for a cap on gains — last month. The quant manager called the funds “an investment failure” after finding that a majority of 99 strategies analyzed underperformed on a five-year basis. As such, the “vast majority” of investors in buffered funds would have fared better just by having less equity risk in their portfolios from the jump, according to AQR principal Dan Villalon.

Just a few days after that AQR report, BlackRock came out with a bullish forecast that defined outcome ETFs — a category that includes buffers — will reach $650 billion by 2030 (more on BlackRock’s view in a minute). 

Now, in the weeks since AQR threw down that gauntlet, volatility has erupted and stocks have convulsed because of the Trump administration’s trade war. That has only made buffers more popular among nervous investors watching the wipe-out in the S&P 500. But while AQR’s Villalon is sympathetic to the human craving for comfort, that feeling isn’t free:

There is one bit of push-back that I am sympathetic to, and that is these offer comfort to investors. What we’re hoping to show in our analysis is that there is a cost to comfort. Yes, maybe that explains some of the appeal, but it still doesn’t make it a good idea. What does make something a good idea, we think, is one, if the data supports it, and two, if economic theory says it should work going forward. For us, alternatives check those two boxes. Buffered ETFs do not.

The Case For

In this week’s Drill Down on Bloomberg Television’s ETF IQ, BlackRock’s Robert Hum stopped by to talk about the iShares Large Cap Max Buffer Jun ETF (ticker MAXJ) and to also respond to critiques of the category. When in comes to AQR’s analysis, Hum said that grouping a bunch of these products together doesn’t work:

Each product is going to be very different, so looking at them in totality is going to be really challenging. So, MAXJ as an example — 100% buffer product, 10% upside cap — is going to look a lot different than IVVM, our quarterly product that protects for 5% on the downside with 6% upside cap. So again, I think these products are going to be really different, it’s really hard to look at them in one broad-brush.

That brings us to MAXJ, which seeks to provide up to 100% downside against the S&P 500 for an approximately one-year period beginning at the end of each June. Since the end of last June, MAXJ is higher by 2.4% on a total return basis, while the index itself is slightly negative. 

Hum said that one of the main ways that investors are using MAXJ is as a first step off the sidelines and back into equities:

If we think about the $7 trillion in money markets today, a lot of those investors are worried about entering the markets at the wrong time. I think the last couple months proves that. And so having that protection in place is really critical for those clients.

MAXJ has accumulated about $110 million in assets and charges 50 basis points annually. 

In Other News

Investors are dumping ETFs tracking Chinese stocks at a record pace as the world’s biggest economies face off in an escalating trade war.

But, investors poured money into exchange-traded funds focused on Canadian equities last week at a rate not seen in four years.

Crypto exchange Kraken has expanded beyond digital assets and into trading of US stocks and ETFs through a brokerage partnership.

No one spoils a party quite like the Securities and Exchange Commission. 

The SPDR SSGA IG Public & Private Credit ETF (PRIV) still only has two days of net inflows to its name since its late February inception, data compiled by Bloomberg show. And after an initial burst of activity, trading volume has pancaked as well. It’s a curious degree of non-interest given how closely the industry was watching this launch.

So, what gives? One of the prevailing theories out there is that the SEC spoiled demand for PRIV during its crucial fledging period. Remember, the regulator published a harshly worded letter detailing its concerns about the fund’s liquidity, valuation and even its name (which has since been changed). It seems like investors and advisors took that to heart.

“It’s been surprising that demand hasn’t been stronger for PRIV right out of the gate,” said Cinthia Murphy, an investment strategist at data provider VettaFi. “I believe appetite for access to private assets is real, but I think we’ve learned that so are the concerns about the difference in liquidity between the ETF wrapper and the underlying private assets.”

“We are very pleased and satisfied with PRIV’s performance, both in terms of returns, trading volume and spreads,” a representative for State Street said in an email. A representative for Apollo declined to comment.

Not even relative outperformance has enticed any buyers. PRIV has only slipped about 0.5% on a total return basis since its Feb. 26 inception, less than drops seen by iShares iBoxx $ Investment Grade Corporate Bond ETF and iShares iBoxx High Yield Corporate Bond ETF, according to data compiled by Bloomberg. 

It’s worth noting that there haven’t been any meaningful copycat filings from rival issuers, which we’ve seen in other categories. Instead, other asset managers seem to be looking beyond the ETF wrapper. Earlier this week, Blackstone said it was teaming up with Vanguard Group and Wellington Management as part of a bid to offer private assets to more individual investors. KKR and Capital Group also plan to launch hybrid public-private funds in 2025.

Ex-LTCM founder Victor Haghani and Rebecca Venter of Vanguard join me, Eric Balchunas and Scarlet Fu on Bloomberg Television’s ETF IQ. We’re live on Mondays at noon. Watch on Bloomberg Television’s ETF IQ, on the Bloomberg Terminal at TV <GO> and on YouTube.