First Trust unveils Nasdaq 100 and MSCI EAFE ‘Target Outcome’ ETFs

Dec 29th, 2020 | By | Category: Alternatives / Multi-Asset

ETF Strategy events are back! Please join us for breakfast briefings on Digital Assets & the Blockchain Economy on Thursday 2nd September 2021 (08:15-11:00) and Thematic Investing on Friday 3rd September 2021 (08:15-11:15) both at Yauatcha City, Broadgate Circle, London. Sponsors include First Trust, GHCO, MSCI, Rize ETF, VanEck and WisdomTree.


First Trust has expanded its suite of ‘Target Outcome’ ETFs with the launch of two new ‘Buffer’ strategies based on the Nasdaq 100 and MSCI EAFE indices.

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, which have listed on Cboe BZX Exchange, are the FT Cboe Vest Growth-100 Buffer ETF–December (QDEC US) and the FT Cboe Vest International Equity Buffer ETF–December (YDEC US).

Each fund comes with an expense ratio of 0.90%.

First Trust’s Buffer ETFs 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 – customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation. QDEC invests in FLEX Options on the $150 billion Invesco QQQ Trust (QQQ US), while YDEC invests in FLEX Options on the $52bn iShares MSCI EAFE ETF (EFA US).

Each Buffer ETF holds a portfolio of FLEX Options so as to shield investors from the first 10% of losses on its reference ETF over a one-year outcome period. The initial outcome period runs until 17 December 2021.

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 at that time.

According to First Trust, the initial caps for QDEC and YDEC are 17.04% and 13.79%, respectively. Both caps are stated before fees and expenses.

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

Investors should note that, as the target outcome profile has been tailored for the entire outcome period, this may affect the Buffer ETFs’ interim returns during the outcome period in two ways.

Firstly, due to the time value of the underlying options, Buffer ETFs are likely to exhibit a lower beta than traditional index-tracking ETFs. As such, Buffer ETFs may lag the performance of their reference ETFs when markets are trending upwards.

Secondly, Buffer ETFs are designed to avoid the initial 10% of losses of the Nasdaq 100 or MSCI EAFE, as applicable, as referenced from the start of the outcome period. An investor who purchases shares of a Buffer ETF after the outcome period has begun may be immediately exposed to the downside of the Nasdaq 100 or MSCI EAFE in so far as those indices have appreciated since the start of the outcome period.

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

First Trust debuted its first Target Outcome ETFs in November 2019. The suite, which includes 18 ETFs offering different target outcome profiles on the SPDR S&P 500 ETF (SPY US), currently houses over $1.5bn in assets under management, highlighting the strong demand for access to this segment.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, commented, “We are gratified by the growing number of investment advisors that have embraced Target Outcome ETFs for their clients, and we’re excited to expand this line-up to include hedged exposure to other indices.”

Karan Sood, CEO of Cboe Vest Financial and portfolio manager for the ETFs, added, “Cboe Vest is pleased to continue leading innovation in the Target Outcome space, working with First Trust to extend the Buffer Strategy to new reference assets. We’ve seen broad interest from investors seeking to participate in some of the upside of other reference assets such as QQQ and EFA with a level of protection against losses.”

Tags: , , , , , , , , , , , ,

Leave a Comment