First Trust rolls out laddered S&P 500 target outcome ETF with ‘Deep Buffer’

Jan 25th, 2021 | By | Category: Alternatives / Multi-Asset

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First Trust has rolled out a new laddered target outcome ETF of ETFs which diversifies equally across four of the firm’s S&P 500-referenced ‘Deep Buffer’ products.

First Trust rolls out laddered S&P 500 target outcome ETF with ‘Deep Buffer’

First Trust has partnered with Cboe Vest on a second target outcome ETF of ETFs,

The FT Cboe Vest Fund of Deep Buffer ETFs (BUFD US) has listed on Cboe BZX Exchange and comes roughly six months after the issue introduced the FT Cboe Vest Fund of Buffer ETFs (BUFR US) which diversifies across four of the firm’s S&P 500 ‘Buffer’ ETFs.

Each Buffer ETF shields investors from the first 10% of losses in the S&P 500 over a one-year outcome period, while each Deep Buffer ETF caters to investors seeking a stronger risk management approach by protecting against 25% of losses between -5% and -30% over a one-year outcome period.

The target outcome periods for the four ETFs are spaced at quarterly intervals starting in February, May, August, and November.

To achieve their target outcome profiles, the Buffer and Deep Buffer ETFs 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.

The downside protection comes at the expense of a cap on the potential upside of each ETF over the outcome period. The cap for each fund is set at the beginning of the outcome period and is dependent upon market conditions (notably implied volatility) at that time.

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.

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

By introducing diversified Buffer and Deep Buffer ETFs, First Trust aims to offer target outcome strategies that can be allocated to at any point during the year without regard for the outcome period of the underlying ETFs.

The ETFs seek to provide lower volatility, beta, and drawdowns relative to the S&P 500. The laddered approach allows a smoother exposure to the upside cap limit compared to individual Buffer or Deep Buffer ETFs which are dependent on volatility expectations at fund inception.

BUFD comes with an expense ratio of 1.05% which consists of a 0.20% management fee as well as 0.85% in acquired fund fees for investing in the underlying Deep Buffer ETFs.

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