Global X has added two new ETFs to its suite of defined outcome strategies that offer investors exposure to large-cap US equities while buffering against downside risk.

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

The Global X Annual Buffer UCITS ETF (SPAB LN) and Global X Annual Tail Hedge UCITS ETF (SPAH LN) have been listed on London Stock Exchange in US dollars and pound sterling as well as on Deutsche Börse Xetra in euros.

Each fund comes with an expense ratio of 0.50%.

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.

SPAB tracks the CBOE S&P 500 Annual 15% Buffer Protect Index which provides a buffer against the first 15% of losses on the S&P 500 over an outcome period of one year.

SPAH, meanwhile, is linked to the CBOE S&P 500 Annual 30% (-5% to -35%) Buffer Protect Index which delivers a 30% buffer on the S&P 500, protecting against losses between -5% and -35% from the start of its one-year outcome period.

The funds achieve their downside protection by utilizing put spreads based on S&P 500 options. They then sell 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 outcome period. The cap for each ETF is set at the beginning of the outcome period and is dependent upon conditions in options markets at that time.

According to Global X, the initial caps for SPAB and SPAH are 17.31% and 14.58%, respectively, before fees and expenses.

Global X’s Buffer ETFs have a perpetual structure meaning that the funds’ buffers and caps are reset at the end of every outcome period.

Investors should note that, as the ETFs’ defined outcome profiles have been tailored for a specific outcome period, this may affect the funds’ 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 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 outcome period. An investor who purchases shares of a Buffer 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, 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.

Global X introduced Europe’s first suite of defined outcome ETFs in February with the launch of two Buffer funds that are also based on the S&P 500. The Global X S&P 500 Quarterly Buffer UCITS ETF offers protection against the first 5% of losses in the S&P 500 on a quarterly basis, while the Global X S&P 500 Quarterly Tail Hedge UCITS ETF delivers a 9% buffer, protecting against losses between -3% and -12% each quarter.

Commenting on the expanded ETF suite, Rob Oliver, Head of Business Development for Global X ETFs in Europe, said: “Amid significant market uncertainty, more investors are seeking to protect their portfolios against sharp equity downturns and maintain defined levels of risk. Global X’s latest defined outcome strategies can help investors achieve these goals and highlight our firm’s long-term commitment to the European market through innovative ETF solutions.”