First Trust rolls out second risk-controlled S&P 500 ‘buffer’ ETF in Canada

Feb 5th, 2020 | By | Category: Alternatives / Multi-Asset

First Trust Portfolios Canada has introduced its second structured, risk-controlled S&P 500 ETF with the launch of the First Trust Cboe Vest US Equity Buffer ETF – November (NOVB.F CN) on Toronto Stock Exchange.

Karl Cheong, Head of Distribution at First Trust Canada

Karl Cheong, Head of Distribution at First Trust Canada.

The fund offers exposure to the bellwether S&P 500 Index while protecting the fund against potential losses up to a predetermined amount.

The ETF is sub-advised by Virginia-based financial advisory platform Cboe Vest Financial and gains its exposure by investing in FLexible EXchange Options (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 FLEX Options are set such that the fund shields investors from the first 10% of losses over its initial ‘outcome period’ of approximately one year from November 2019.

The downside protection comes at the expense of a cap on the potential upside of the ETF over the one-year outcome period. The cap is set at the beginning of the outcome period and is dependent upon market conditions at that time – for the first outcome period until November 2020, the cap has been set at 8.57%.

The fund can be held indefinitely as terms will reset at the end of each outcome period; however, the cap and buffer for each subsequent target outcome period will likely differ from their previous values.

The ETF hedges currency exposure between the US and Canadian dollar and comes with an expense ratio of 0.85%.

Karl Cheong, Head of Distribution at First Trust Canada, commented, “Our goal at First Trust Canada is to provide high-quality, innovative tools for investment advisors. We believe this ETF will be effective for those seeking equity-like upside potential for their clients with a limited downside buffer.”

Karan Sood, CEO of Cboe Vest, 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 Canada to offer an ETF which provides a 10% buffer on US large-cap equities, providing an opportunity for upside potential while shielding against a level of losses.”

The fund complements the First Trust Cboe Vest US Equity Buffer ETF – August (AUGB.F CN) which provides structured, risk-controlled exposure to the S&P 500 over a one-year outcome period up to August 2020. Collectively, the funds suggest that First Trust is planning to roll out a suite of four ‘Buffer’ ETFs with outcome periods ending in each quarter of the year.

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