First Trust has expanded its ‘Target Outcome’ ETF suite with the first fund offering S&P 500 exposure with a variable buffer that resets quarterly.

The fund dynamically adjusts its buffer to ensure an upside cap exceeding a predefined minimum threshold.

The FT Vest US Equity Quarterly Dynamic Buffer ETF (FHDG US) has been listed on Cboe BZX Exchange with an expense ratio of 0.85%.

Target outcome investing, also known as defined outcome investing, tailors potential investment outcomes by aligning protection and return levels to investor needs.

It typically offers a specific level of downside protection (a “buffer”) over a specific time frame, with a corresponding cap on upside potential. The outcome profile is achieved through options-based strategies, where the cap level depends on prevailing market conditions at the outset.

Unlike traditional target outcome ETFs with fixed buffers, FHDG introduces a dynamic approach. It seeks to provide a buffer against the first 7.5% of S&P 500 losses while ensuring an upside cap of at least 3.5%.

If the market conditions do not allow for both, the fund adjusts by reducing the buffer to the first 5.0% of losses and accepting the maximum upside cap. The fund’s outcome period is three months, with buffers and caps resetting at the end of each quarter in perpetuity.

Ryan Issakainen, Senior Vice President and ETF Strategist at First Trust, commented: “As equities have rallied this year, many investors are seeking innovative ways to manage downside risk. This ETF addresses that need by dynamically adjusting its buffer to balance risk and return.”

Jeff Chang, President of Vest Financial, the ETF’s sub-advisor, added: “FHDG offers a targeted upside growth opportunity on the S&P 500, coupled with a modest, dynamic buffer against downside risks.”

Investors should note specific considerations tied to the fund’s tailored outcome periods. First, the time value of the underlying options means the ETF may exhibit lower beta, potentially underperforming the S&P 500 during strong market rallies. Second, the buffer is calculated from the start of the outcome period. Investors purchasing the ETF mid-period may be immediately exposed to the downside in so far as the index has appreciated since the period began.

To mitigate these challenges, First Trust offers daily disclosures for its Target Outcome ETFs, including updated cap and buffer levels, the downside remaining before the buffer, and days left in the outcome period. This transparency allows investors to make informed decisions about the fund’s suitability within their portfolios.