ETFs
First Trust Adds US Small-Cap “Buffer” ETFs-of-ETFs | ETF Strategy
First Trusted Advisors has expanded its range of defined outcome investments with an ETF of ETFs that diversifies across four of the company’s portfolios. Russell 2000 “Moderate buffer” fund.
Defined outcome ETFs seek to provide a more controlled investment experience.
THE FT Vest Laddered Small Cap ETF with Moderate Buffer (BUFS US) was listed on Cboe BZX Stock Exchange with a spending rate of 1.10%.
Outcome ETFs provide exposure to an index while protecting, or “buffering,” invested capital against a predetermined amount of potential losses over a specific outcome period.
First Trust’s Russell 2000 Moderate Buffer ETFs protect investors from the first 15% of Russell 2000 losses over a one-year outcome period.
To achieve their defined outcome profiles, these ETFs invest in FLexible EXchange (FLEX) options on the iShares Russell 2000 ETF (IWM US). FLEX options are customizable exchange-traded options contracts whose settlement is guaranteed by Options Clearing Corporation.
Downside protection comes at the expense of a cap on the potential upside of each ETF over the outcome period. The cap for each fund is set at the start of the outcome period and depends on market conditions (including implied volatility) at that time.
At the end of each earnings period, ETFs do not expire but are rebalanced and reset, providing investors with new buffers and upside caps based on market conditions at that time.
Since moderate buffer ETFs have been tailored to their specific outcome period, an investor may face a different risk profile if investing after the outcome period begins. For example, investors may be exposed to immediate downside risk and have less upside potential if the ETF has increased between the start of its outcome period and the time the investor joined the fund.
Likewise, investors could also be exposed to less downside protection and greater upside participation potential if the ETF fell between the start of its reporting period and the time the investor entered the bottom.
These dynamics can present a challenge from a portfolio management perspective; However, the recently launched FT Vest Laddered Small Cap Moderate Buffer ETF aims to alleviate much of this complexity by offering a strategy that can be allocated at any time of the year, without regard to the outcome period of the underlying ETFs. underlying.
The fund invests equally in four Russell 2000 Moderate Buffer ETFs that have outcome periods with staggered start dates throughout the year in February, May, August and November. The ETF rebalances toward an equal allocation of the four Buffer ETFs each quarter.
By diversifying across the four Buffer ETFs, the FT Vest Laddered Small Cap Moderate Buffer ETF offers a simple way to reduce timing risks over the long term. The rules-based approach, however, means that the ETF will still be invested in the four Buffer ETFs, even if those funds reach their cap or exhaust their buffers.
Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, commented: “Risk management remains a top concern for many investors, which helps explain the growing popularity of buffered ETFs. We believe BUFS can be an effective tool for investment professionals seeking exposure to small-cap stocks with lower volatility and some level of downside protection via its underlying ETF holdings.
Jeff Chang, President of Vest Financial, sub-advisor to BUFS, added: “Today’s launch of BUFS could be attractive to investors looking for a risk-diversified way to participate in some of the upside potential of BUFS. Russell 2000 index with a level of protection against losses. . BUFS offers a practical integrated tiered approach that recalibrates a portion of the investment to current IWM levels on an ongoing basis. There has been a steady increase in demand for risk-diversified buffer investments since 2016, when we introduced the first laddered portfolio of buffer strategies in a registered investment company.