First Trust introduces ‘Target Outcome’ ETFs

Nov 8th, 2019 | By | Category: Alternatives / Multi-Asset

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First Trust has unveiled four ‘target outcome’ ETFs offering a structured play on US equities.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust.

Target outcome strategies target a defined return profile, with an allowance for a specific level of risk, at a particular point in time.

The funds include the FT Cboe Vest US Equity Buffer ETF – August (FAUG US) and FT Cboe Vest US Equity Deep Buffer ETF – August (DAUG US), which debuted on Cboe BZX this week, and the FT Cboe Vest US Equity Buffer ETF – November (FNOV US) and FT Cboe Vest US Equity Deep Buffer ETF – November (DNOV US), which are set to commence trading next week.

The funds are actively managed by Cboe Vest Financial, the funds’ sub-advisor, in line with a systematic rules-based model.

To achieve their target outcome profiles, the funds invest in FLexible EXchange (FLEX) Options on the SPDR S&P 500 ETF (SPY US). FLEX Options are customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation.

FAUG, the “Buffer” ETF,  shields investors from the first 10% of losses, while DAUG, the “Deep Buffer” ETF, shields investors against 25% of losses, between -5% to -30%. The funds’ outcome period runs for one year and ends in August 2020. FNOV and DNOV follow identical strategies, respectively, but with outcome periods ending in November 2020.

The cap on upside potential is set at the beginning of any outcome period and is dependent upon market conditions at that time. According to First Trust, the estimated cap for FAUG is between 7.15%-9.25%, and the estimated cap for DAUG is between 6.62%-7.48%.

The funds have a perpetual structure meaning that once an outcome period ends, a new target outcome period begins, with the cap and buffer reset.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, commented, “Our goal at First Trust is to provide high-quality, innovative tools for investment advisors. We believe these ETFs will be effective for those seeking equity-like upside potential for their clients with a limited downside buffer.”

Karan Sood, CEO of Cboe Vest and portfolio manager for the funds, added, “Investors want to reduce their exposure to downside risk in equities, while retaining the opportunity for meaningful upside returns. We are delighted to work with First Trust to offer the Target Outcome ETFs on US large-cap equities, providing an opportunity for upside potential while shielding against a level of losses.”

The ETFs come with expense ratios of 0.85%.

They will compete against similar products offered by Innovator Capital under its ‘Buffer’ product banner.

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