Trade wars, interest rates and fears of a global economic slowdown are contributing to a growing wall of worry for investors in 2019. The decade-long bull run is heading into late cycle territory, which means investors must exercise more due diligence and be more tactical when it comes to allocating capital in a murky investing landscape–a case for targeted outcome investing–something that Cboe Vest knows best.
Target outcome investments (TOIs) seek a specific investment outcome realized at a specific point in the future using a specified level of risk. In order to achieve this targeted level of return, TOIs employ investment strategies that seek to maximize the probability of meeting the targeted outcome to increase the chances of realizing these desired investment returns.
“We are building a new class of investments, called Target Outcome Investments, that target a defined return profile at a specific point in time in the future, with an allowance for a specific level of downside risk,” said Cboe Vest CEO Karan Sood. “Such investments strive to provide investors with targeted protection, enhanced returns, consistent income, or some combination thereof.”
Rooted in Derivatives
It’s a strategy rooted in derivatives and more specifically, options contracts. Options give a contract holder the right, but not the obligation, to buy or sell a security or other asset at a predetermined price on or before a specific date in the future.
The use of contracts serving as the impetus for TOI investments was a strategy that was strictly relegated to institutional investors until now. Retail investors, regardless of net worth, can now access these strategies through Cboe Vest’s exchanged-traded products (ETPs).
“Target Outcome Investments have been accessible to institutions and high net-worth individuals through derivatives, swaps and structured notes for decades,” said Sood. “However, they have not been available for mainstream investors through their preferred delivery mechanisms. Cboe Vest has led the path to change that.”
It’s an investment space that appears complex, but one that Cboe Vest thrives in and has done so for quite some time.
“Cboe Vest pioneered the development of the first-ever set of indexes that used FLEX options to deliver Target Outcome Investments,” said Sood. “We invented the very first set of indexes and transferred our IP for this concept to SPDJI and Cboe back in 2016. We contemplated the first set of products on these indexes. We were the first to launch Target Outcome Investments as mutual funds. We now have four mutual funds and an ETF.”
Funds to Consider
Investors in the current market landscape are not only seeking innovative ways to obtain returns, but to do so with downside protection built in. This is where the CBOE Vest S&P 500® Buffer Strategy Fund (Nasdaq: BUIGX) would fit into their portfolio.
“Our Buffer Protect Strategy, packaged in a mutual fund, is unique,” said Sood. “It provides access to a portfolio of Buffer Protect Strategies that seek to buffer the first 10% of losses in the S&P 500 while allowing participation in gains to a cap. It offers investors an alternative to manage risk that is complimentary to the traditional 60-40 asset allocation.”
For investors seeking a steady stream of income, Cboe Vest has the Cboe Vest S&P 500® Dividend Aristocrats Target Income ETF (BATS: KNG).
“We have a very interesting dynamic partial covered call strategy on Dividend Aristocrats, targeting a specific level of income. This strategy, accessible in both an ETF and mutual fund, sells calls on a small portion of the holdings of Dividend Aristocrats stocks, seeking to deliver yields of 3 – 3.5% over the annual S&P 500 dividend yield.
Fears of a global economic slowdown saw the Dow Jones Industrial Average post five losing sessions in a row in early March, which is a reminder to investors that the volatility that racked the markets in the fourth quarter of 2018 could return at any time. In 2019, investors are looking to play more defense against volatility and with ETF products from Cboe Vest that focus on target outcomes, they have that peace of mind knowing their capital is in products that have their best interest in mind.
“Target Outcome Investment strategies can deliver return profiles that enhance income or allow investors to shift potentially higher portions of returns for less downside exposure,” said Sood. “They do not require investors to engage in market timing or rebalancing and some automatically lower equity exposure as indexes decline. They can be structured to cover a specific investment time or diversified across a variety of time horizons for investors who have less precise investment goals.”
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