PGIM enters defined outcome investing with two ‘Buffer’ ETFs

Jan 3rd, 2024 | By | Category: Equities

PGIM Investments has introduced its first defined outcome ETFs with the launch of two funds offering downside protection on the S&P 500.

Stuart Parker, President and CEO of PGIM Investments

Stuart Parker, President and CEO of PGIM Investments.

Defined outcome, or target 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.

PGIM’s inaugural defined outcome ETFs are the PGIM US Large-Cap Buffer 12 ETF (JANP US) and the PGIM US Large-Cap Buffer 20 ETF (PBJA US), both of which are listed on Cboe BZX Exchange.

Actively managed by PGIM Quantitative Solutions, JANP and PBJA seek to match the price return of the S&P 500 while offering protection against the first 12% and 20% of losses, respectively, over a one-year outcome period.

The funds’ defined outcome profiles are obtained through investing in FLexible EXchange (FLEX) options – customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation – on the S&P 500.

The ETFs’ downside protection comes at the expense of caps on their potential upside over the one-year outcome period. The caps for the funds are set at the beginning of the outcome period and are dependent upon market conditions at that time.

According to PGIM, the initial caps of JANP and PBJA are 15.69% and 12.17% (before fees and expenses), respectively.

Defined outcome ETFs have a perpetual structure meaning that their buffers and caps are reset at the end of each annual outcome period.

Investors should note that, as the ETFs’ defined outcome profiles have been tailored for their 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, the ETFs are likely to exhibit lower betas than traditional index-tracking ETFs. As such, they may lag the performance of the S&P 500 when markets are trending upwards.

Secondly, the ETFs are designed to provide specific levels of protection as referenced from the start of their outcome period. An investor who purchases shares of the ETFs 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, PGIM 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.

JANP and PBJA come with expense ratios of 0.50% each, making them the lowest-cost one-year defined outcome ETFs currently available in the US. Each ETF represents the first in a series with further ‘Buffer 12’ and ‘Buffer 20’ funds to be launched on a rolling basis on the first business day of each month throughout this year.

Stuart Parker, President and CEO of PGIM Investments, commented: “In times of market uncertainty, our clients are looking for ways to participate in the market’s upside while tempering downside risks. Buffer ETFs provide investors with a more narrowly defined outcome range, which can offer more predictability in volatile markets.”

Linda Gibson, CEO of PGIM Quantitative Solutions, added: “PGIM Quant has been managing options trading strategies for institutional investors for more than 30 years. The Buffer ETF series represents yet another enhancement to our suite of offerings for clients who are looking for meaningful upside access while helping to mitigate risk.”

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