First Trust launched four actively managed Target Outcome ETFs on Cboe in November as a way to gain access to outcome-based investing.
The new ETFs are:
- FT Cboe Vest U.S. Equity Buffer ETF – August (Cboe: FAUG)
- FT Cboe Vest U.S. Equity Deep Buffer ETF – August (Cboe: DAUG)
- FT Cboe Vest U.S. Equity Buffer ETF – November (Cboe: FNOV)
- FT Cboe Vest U.S. Equity Deep Buffer ETF – November (Cboe: DNOV)
The funds offer a way to gain access to outcome-based investing—specifically to buffer against a level of downside risk while allowing growth to a maximum cap— eliminating bank credit risk, in a convenient, flexible investment vehicle.
Ryan Issakainen, CFA, Senior Vice President, ETF Strategist at First Trust, said they believe a buffer against a level of losses can help investors stay invested during volatile times.
“Our goal at First Trust is to provide high-quality, innovative tools for investment advisors. We believe these ETFs will be effective for those seeking equity-like upside potential for their clients, with a limited downside buffer,” said Issakainen.
The funds are managed and sub-advised by Cboe Vest Financial LLC (“Cboe Vest”) using a “target outcome strategy” or pre-determined target investment outcome.
Karan Sood, CEO of Cboe Vest and portfolio manager for the funds, said investors want to reduce their exposure to downside risk in equities, while retaining the opportunity for meaningful upside returns.
“We are delighted to work with First Trust to offer the Target Outcome ETFs® on U.S. Large Cap Equities, providing an opportunity for upside potential while shielding against a level of losses,” Sood said. “The four ETFs represent the latest addition to Cboe Vest’s suite of Target Outcome Investments® (which includes ETFs, mutual funds, unit investment trusts (UITs), and managed accounts) providing advisors with a full arsenal of options-based risk management strategies.”
The funds seek an outcome that provides investors with returns (before fees and expenses) that match those of the SPDR® S&P 500® ETF Trust (“SPY” or “underlying ETF”), up to a pre-determined upside cap, while providing a buffer against potential SPY losses.
To achieve their objectives, the ETFs use SPY FLexible EXchange Options (“FLEX Options”). FLEX Options are customized option contracts that provide investors the ability to customize key contract terms, such as exercise prices, styles and expiration dates. FAUG and FNOV seek to shield investors from the first 10% of losses (before fees and expenses) and DAUG and DNOV seek to shield investors against 25% of losses, between -5% to -30% (before fees and expenses). The buffer levels are based upon the value of SPY at the time the funds enter into the FLEX Options contracts on the first day of the approximately one-year period known as the Target Outcome Period.
If an investor purchases shares after the first day of a Target Outcome Period, they will likely have a different return potential than an investor who purchased shares at the start of a Target Outcome Period and the buffer the fund seeks may not be available. The funds have a perpetual structure meaning that a new Target Outcome Period begins, and the cap and buffer are reset, annually at the end of each Target Outcome Period. However, the funds may be held indefinitely, providing investors a buy and hold investment opportunity.
In addition to Karan Sood, Howard Rubin, of Cboe Vest, will also serve as a portfolio manager for the funds. The portfolio managers are jointly and primarily responsible for the day-to-day management of the funds.
For more information, visit https://www.ftportfolios.com/retail/etf/etflist.aspx?Type=TargetOutcome.