Global X ETFs has unveiled Europe’s first suite of defined outcome ETFs with the launch of two ‘Buffer’ funds based on the S&P 500.

Rob Oliver, Head of Business Development for Global X ETFs in Europe.

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.

So far this type of investment strategy has primarily been offered through structured products in Europe. Over the last few years, however, defined outcome ETFs have taken off in the US, highlighting a potential opportunity for European ETF product developers.

Commenting on the ETFs’ introduction, Rob Oliver, Head of Business Development for Global X ETFs in Europe, said: “Amid continued market volatility and recession fears, many investors are looking to thwart anticipated drawdowns in equity markets and maintain defined levels of risk and reward. I am thrilled that Global X is demonstrating our commitment to the European market through these new defined outcome strategies which will provide investors with the tools they need to maintain a smoother ride while staying exposed to US equities.”

The ETFs

The two new funds are the Global X S&P 500 Quarterly Buffer UCITS ETF, which offers protection against the first 5% of losses in the S&P 500 on a quarterly basis, and the Global X S&P 500 Quarterly Tail Hedge UCITS ETF, which includes a 9% buffer, protecting against losses between -3% and -12% each quarter. The funds achieve their downside protection by utilizing put spreads based on S&P 500 options with remaining maturities of three months.

The ETFs then sell three-month call options on the S&P 500 at strike prices that exactly offset the cost of their put spreads. These written call options act as a cap on the ETFs’ potential upside over the quarter. The cap for each ETF is set at the beginning of the quarter and is dependent upon conditions in options markets at that time.

According to Global X, the initial caps for the Global X S&P 500 Quarterly Buffer UCITS ETF and Global X S&P 500 Quarterly Tail Hedge UCITS ETF are 6.67% and 5.62%, respectively. Both caps are stated before fees and expenses and are relative to an outcome period from 1 January to 31 March 2023.

Global X’s Buffer ETFs have a perpetual structure meaning that the funds’ buffers and caps are reset every quarter.

Investors should note that, as the ETFs’ defined outcome profiles have been tailored for a specific quarter, this may affect the funds’ interim returns during the quarter 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 underlying indices when markets are trending upwards.

Secondly, Buffer ETFs are designed to provide a specific level of protection as referenced from the start of the quarter. An investor who purchases shares of a Buffer ETF after the quarter 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 quarter.

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

The Global X S&P 500 Quarterly Buffer UCITS ETF has been listed on the London Stock Exchange in US dollars (SPQB LN) and pound sterling (SQBP LN) as well as on Deutsche Börse Xetra in euros (SPQB GY).

Similarly, the Global X S&P 500 Quarterly Tail Hedge UCITS ETF has also been listed on LSE (USD: SPQH LN; GBP: SQHP LN) and Xetra (EUR: SPQH GY).

Each ETF comes with an expense ratio of 0.50%.