Allianz Investment Management has expanded its defined outcome investment suite with a new series of ETFs that offer uncapped US equities exposure while limiting maximum potential loss.

The ETF offers uncapped US equities exposure while incorporating a 15% downside buffer.

The first fund in the series is the AllianzIM U.S. Equity Buffer15 Uncapped Apr ETF (ARLU US). It has been listed on Cboe BZX Exchange with an expense ratio of 0.74%.

Traditionally, defined outcome ETFs provide upside participation on an underlying reference asset or index, up to a cap, while protecting or ‘buffering’ against a pre-determined amount of potential losses over a specific outcome period (usually one year).

ARLU is similar in that it offers investors exposure to the S&P 500 with an initial 15% downside buffer over a one-year outcome period.

Unlike traditional defined outcome ETFs, however, ARLU allows for unlimited equity upside potential, subject to surpassing a predefined spread. This means that the S&P 500 must experience an appreciation exceeding a specific threshold at the commencement of the outcome period before the ETF can partake in any upward gains.

The ETF’s defined outcome profile is obtained through investing in FLexible EXchange (FLEX) options – customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation – on the SPDR S&P 500 ETF (SPY US).

The initial spread for the fund is set at the beginning of the outcome period and is dependent upon market conditions at that time.

According to Allianz, ARLU’s initial spread before fees and expenses is 2.96% (the initial spread is 3.70% after fees and expenses). The initial one-year outcome period ends on 31 March 2024.

The fund has a perpetual structure meaning that its buffer and spread are reset at the end of each annual outcome period.

Investors should note that, as the ETF’s defined outcome profile has been tailored for its specific outcome period, this may affect the fund’s interim returns during the outcome period in two ways.

Firstly, due to the time value of the underlying options, the ETF is likely to exhibit a lower beta than traditional index-tracking ETFs. As such, it may lag the performance of the S&P 500 when markets are trending upwards.

Secondly, the ETF’s buffer and spread are referenced from the start of the outcome period. An investor who purchases shares of the ETF after the outcome period has begun may be immediately exposed to the S&P 500’s downside in so far as the index has appreciated since the start of the outcome period. Similarly, an investor may be able to participate immediately in the S&P 500’s upside in so far as the index has depreciated since the start of the outcome period or if the index has already appreciated beyond the spread.

While these dynamics can present a challenge, Allianz provides full daily disclosure for its defined outcome ETFs. Investors can observe ARLU’s remaining spread and buffer levels, remaining downside before buffer, and remaining days in the outcome period on the Allianz website.

Allianz has indicated its intention to roll out 12 ETFs within this new series by launching a new fund each month, thereby offering investors greater flexibility in determining their entry point into the strategy.

Commenting on the launch of the new series, Chris Chambs, CEO of Allianz Investment Management, said: “During periods of bullish sentiment, investors increasingly seek strategies that can capitalize on the unlimited potential of equities, while still providing a level of protection against downside risk. That’s exactly what our new Buffer15 Uncapped ETFs deliver. As markets shift with technological advancements and changing monetary policies, Allianz Investment Management is committed to forward-thinking solutions that put our clients’ needs first.”

Johan Grahn, Head of ETF Market Strategy at Allianz Investment Management, added: “Historically, the S&P 500 has often delivered exceptional returns during strong market periods. Our uncapped ETFs are designed to enable investors to participate in these rallies. At the same time, we recognize the importance of downside protection, which is why we’ve incorporated a 15% buffer to provide a level of risk mitigation during periods of volatility.”