First Trust Advisors has begun rolling out a new Target Outcome series, branded ‘Max Buffer’ ETFs.

Target Outcome ETFs seek to deliver a more controlled investment experience.

Target outcome, or 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.

Typically, this involves offering a certain level of downside protection (or ‘Buffer’) over a specific outcome period at the expense of a cap on the potential upside.

In terms of the new series, Max Buffer ETFs will seek to provide the maximum available buffer over a specific outcome period while ensuring the upside cap (before fees and expenses) is no less than a predetermined amount. If a Max Buffer ETF can set the buffer at 100% while adhering to the minimum upside cap rule, it will seek the highest possible cap.

The first fund in the Max Buffer series is the FT Vest US Equity Max Buffer ETF – March (MARM US) which has been listed on Cboe BZX Exchange with an expense ratio of 0.85%.

MARM delivers US large-cap equities exposure (as referenced by the S&P 500), aiming to provide the maximum available buffer over a one-year outcome period while ensuring the upside cap (before fees and expenses) is no less than 7%.

MARM’s Target Outcome profile is obtained through investing in FLexible EXchange (FLEX) options – customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation – on the SPDR S&P 500 ETF (SPY US).

MARM’s buffer and cap are set at the beginning of the outcome period and are dependent upon market conditions at that time. The fund has a perpetual structure meaning that its buffer and cap are reset at the end of each annual outcome period.

According to First Trust, MARM’s initial buffer is 100% while its cap (before fees and expenses) is 9.23%. The initial one-year outcome period ends on 21 March 2025.

While MARM’s buffer for the initial period is 100%, First Trust notes that the expected range of the buffer for future periods can vary between 20% and 100%.

Investors should note that, as MARM’s Target Outcome profile has been tailored for its specific outcome period, this may affect the fund’s interim returns during the outcome period in two ways.

Firstly, due to the time value of the underlying options, the ETF is likely to exhibit a lower beta than traditional index-tracking ETFs. As such, it may lag the performance of the S&P 500 when markets are trending upwards.

Secondly, the ETF is designed to provide a level of protection as referenced from the start of its outcome period. An investor who purchases shares of the ETF after the outcome period has begun may be immediately exposed to the S&P 500’s downside in so far as the index has appreciated since the start of the outcome period.

While these dynamics can present a challenge, First Trust provides full daily disclosure for its Target Outcome ETFs including remaining cap and buffer levels, remaining downside before buffer, and remaining days in the outcome period.