First Trust launches ‘Premium Income’ S&P 500 Buffer ETF

Sep 20th, 2023 | By | Category: Equities

First Trust Advisors has unveiled a new Target Outcome ETF based on the S&P 500 that combines a downside buffer with a set level of income.

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

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

The FT Cboe Vest US Equity Buffer & Premium Income ETF (XISE US) has been listed on Cboe BZX Exchange with an expense ratio of 0.85%.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, commented: “We are thrilled to expand First Trust’s line-up of outcome‐based Buffer ETFs with the launch of XISE. We believe this ETF offers a compelling proposition for investors seeking an attractive level of current income, while also providing a level of downside protection.”

Target Outcome investing, also known as Defined Outcome investing, refers to an investment strategy that shapes the potential outcomes of a reference asset or index to fit specific protection and return levels, allowing for a more controlled investment experience.

The risk-controlled approach has soared in popularity in recent years as investors have sought to navigate increasingly uncertain equity markets – First Trust’s Target Outcome suite housed over $11 billion in total assets as of the end of August 2023.

Target Outcome ETFs traditionally provide a downside buffer over a specific outcome period, usually one year, in exchange for a cap on potential upside performance.

Similar to First Trust’s traditional S&P 500 ‘Buffer’ ETFs, XISE includes a buffer against the first 10% of losses on the S&P 500 over a one-year outcome period – the fund’s initial one-year outcome period runs until 20 September 2024.

The fund utilizes an unexplored strategy, however, by delivering a defined level of income instead of participating in the S&P 500’s potential upside performance. Specifically, the ETF is expected to generate an income yield of approximately 8.19% (before fees and expenses) during its initial outcome period – XISE will make distributions to investors on a monthly basis.

XISE’s Target Outcome profile is achieved by investing in a combination of short-term US Treasury securities as well as FLexible EXchange (FLEX) Options – customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation – on the SPDR S&P 500 ETF Trust (SPY US).

All of First Trust’s Target Outcome ETFs have a perpetual structure meaning that, once an outcome period ends, a new target outcome period begins. In the case of XISE, at the start of a new outcome period, the fund’s 10% buffer will be reset and a new defined level of income will be established for the forthcoming year. The income level will only be known on the date that the outcome period is reset and will vary based on prevailing market conditions related to interest rates, SPY volatility, and the relationship of puts and calls on the FLEX Options.

Investors should note that XISE’s target outcome profile has been tailored for its entire outcome period. As such, the ETF’s interim returns during the outcome period may behave differently.

Notably, XISE is designed to avoid the initial 10% of losses on the S&P 500 as referenced from the start of its outcome period. An investor who purchases shares of XISE after the outcome period has begun may be immediately exposed to downside risk in so far as the S&P 500 has appreciated since the start of the outcome period.

Similarly, investors may be able to participate in the S&P 500’s upside performance in so far as the S&P 500 has depreciated since the start of the outcome period – investors should note, however, that the ETF’s buffer will be lower, or may even be wiped out already, if the S&P 500 has depreciated since the start of the outcome period.

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