First Trust has expanded its suite of Target Outcome ETFs with a new ‘Buffer’ strategy providing moderate downside protection on the S&P 500.

First Trust’s Target Outcome ETFs are sub-advised by options investing specialist Cboe Vest Financial.

First Trust’s Target Outcome ETFs target a defined return profile, with an allowance for a specific level of risk, at a particular point in time.

The risk-controlled approach has soared in popularity in recent years as investors have sought to navigate increasingly uncertain equity markets – First Trust’s Target Outcome suite housed over $7.8 billion in total assets at the end of 2022.

Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, commented: “It can be difficult for investors to remain disciplined in the face of increased market volatility but exposure to equities may be critical for achieving their long-term goals. Target Outcome ETFs have grown increasingly popular among investment professionals because they are an effective tool to help clients gain exposure to stocks while also mitigating downside risk.”

The newest addition to the suite is the FT Cboe Vest US Equity Moderate Buffer ETF – January (GJAN US) which has been listed on Cboe BZX Exchange with an expense ratio of 0.85%.

GJAN is actively managed by Cboe Vest Financial, the fund’s sub-advisor, in line with a systematic rules-based model.

The ETF aims to shield investors from the first 15% of losses on the S&P 500 over a one-year outcome period. The initial outcome period runs until 19 January 2024.

To achieve its target outcome profile, GJAN invests in FLexible EXchange (FLEX) Options – customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation – on the SPDR S&P 500 ETF Trust (SPY US).

GJAN’s downside protection comes at the expense of a cap on its potential upside over the outcome period. The cap is set at the beginning of the outcome period and is dependent upon market conditions at that time. According to First Trust, the initial cap for GJAN is 15.75% before fees and expenses.

All of First Trust’s Target Outcome ETFs have a perpetual structure meaning that, once an outcome period ends, a new target outcome period begins with the cap and buffer reset.

Investors should note that, as the target outcome profile has been tailored for the entire outcome period, this may affect the ETF’s interim returns during the outcome period in two ways.

Firstly, due to the time value of the underlying options, the ETF is likely to exhibit a lower beta than traditional index-tracking ETFs. As such, it may lag the performance of its reference ETF when markets are trending upwards.

Secondly, GJAN is designed to avoid the initial 15% of losses of the S&P 500 as referenced from the start of its outcome period. An investor who purchases shares of GJAN after the outcome period has begun may be immediately exposed to downside risk in so far as the S&P 500 has appreciated since the start of the outcome period.

While these dynamics can present a challenge, First Trust provides full daily disclosure for each of its Target Outcome ETFs including remaining cap and buffer levels, remaining downside before buffer, and remaining days in the outcome period.