KBFR provides small-cap exposure with built-in crash protection, absorbing the first 10% of losses over a one-year period while capping upside gains. It's designed for investors who want small-cap participation but can't stomach the sector's notorious volatility.
How It Works
The fund uses a options overlay on small-cap stocks to create a defined outcome period that resets annually. It sells upside call options to fund protective put options that kick in after a 10% decline. The exact cap and buffer levels are set at each annual reset based on prevailing options prices. Between resets, the fund's protection and cap levels float with market movements.
Key Features
- Absorbs first 10% of small-cap losses over each outcome period
- No expense ratio charged, making it cost-competitive with plain vanilla small-cap ETFs
- Resets annually with new cap/buffer levels based on market conditions
Risks
- Upside is capped around 15-20% annually — you'll miss big small-cap rallies that exceed the cap
- Losses beyond 10% hit dollar-for-dollar — a 30% crash still means you lose 20%
- Protection only works if held for full outcome period — mid-period buyers get partial or no buffer
Who Should Own This
Perfect for retirees or conservative investors who want small-cap exposure but need to limit drawdowns. Also works for advisors building 'sleep well' portfolios where clients tend to panic-sell during corrections. The trade-off is clear: you're buying insurance that costs you the big upside years in exchange for cushioning the inevitable small-cap crashes.