ETFs
PGIM launches two US equity ‘Buffer’ ETF-of-ETFs | ETF Strategy
PGIM investments has expanded its range of defined outcome investments with two laddered ETFs that diversify among the firm’s large-cap U.S. “buffer” funds.
Stuart Parker, President and CEO of PGIM Investments.
THE Buffer 12 ETF PGIM Laddered Fund (BUFP US) And Buffer 20 ETF PGIM Laddered Fund (PBFR US) were listed on Cboe BZX Stock Exchange.
BUFP targets an equal-weighted investment in PGIM’s 12 US Large-Cap Buffer 12 ETFs, each providing exposure to S&P500 while protecting you against the first 12% of losses over a one-year outcome period. Each of the 12 underlying Buffer ETFs has an outcome period that begins in a different month of the year.
Meanwhile, PBFR targets an equal-weighted investment in PGIM’s 12 US Large-Cap Buffer 20 ETFs, each providing exposure to the S&P 500 while protecting against the first 20% of losses over a one-year outcome period.
The two laddered ETFs rebalance each quarter to an equally weighted allocation.
Each underlying Buffer ETF achieves its defined outcome profile by investing in FLexible EXchange (FLEX) options – customizable exchange-traded options contracts whose settlement is guaranteed by Options Clearing Corporation – on the S&P 500.
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.
Because Buffer ETFs have been tailored to their specific outcome periods, an investor may face a different risk profile if investing after the start of the outcome period. 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. Tiered Buffer ETFs aim to alleviate much of this complexity by providing a strategy that can be allocated at any time of the year, without regard to the outcome period of the underlying ETFs.
By diversifying among the underlying buffer ETFs, laddered ETFs offer a simple way to reduce timing risks over the long term. The rules-based approach, however, means that ETFs will still be invested in their underlying 12 Buffer ETFs, even if those funds reach their cap or exhaust their buffers.
Each laddered ETF among ETFs comes with a 0.50% expense ratio, making it the cheapest in its category.
Stuart Parker, President and CEO of PGIM Investments, commented: “Staggered buffer ETFs are one of the fastest growing segments of an already accelerating defined outcome ETF market – but flexibility and accessibility are essential in this space. We have seen strong client demand for underlying buffer ETFs as well as single ticker solutions that can provide effective exposure to this investment style while reducing some of the operational burden of investing in individual monthly vintages.