Defined Outcome ETFs Come With Aggressive Twist

Defined Outcome ETFs Come With Aggressive Twist

The conservative strategy presents an opportunity for tactical risk taking.

Wealth Management Editor
Reviewed by: Staff
Edited by: James Rubin

Defined outcome ETFs that are being marketed for nervous investors hoping to wrap some insurance around their equity exposure also present a unique opportunity for a more aggressive investing strategy in the event of a market pullback.

Issuers of ETFs in this fast-growing category that includes downside protection in exchange for a cap on upside performance aren’t openly promoting alternative investing strategies, but that doesn’t make the opportunity any less legit.

Consider, for example, the new iShares Large Cap Max Buffer Jun ETF (MAXJ), which debuted July 1 offering 100% downside protection and a 10.6% cap on upside performance if held for the full 12-month life of the ETF.

MAXJ’s performance is based on the S&P 500 Index, which is up 2.5% in the ETF’s short life, so buying now would not be the best bet because it would trim that 10.6% upside cap down to 8.1%. SPY three-month flows

And the 100% downside protection wouldn’t kick in until the S&P had dropped back to where it was on July 1.

However, should the S&P 500 suffer a pullback below where it was on July 1 at any point between now and next June when MAXJ reaches full maturity, this ETF and others like it might represent an aggressive buying opportunity.

A Bet on S&P 500

Remember, the downside protection and upside cap, which are set on the issue date of defined outcome ETFs, are guaranteed as long as the investors hold the ETF to maturity, regardless of when it is purchased.

If the S&P 500 experienced a 10% decline over the next few months, as some analysts are predicting, the downside protection for MAXJ would still be locked at where it was on July 1, or 7.5 percentage points above the level of our correction example.

That also works on the upside cap, which means an investor buying in during a pullback could add that difference to 10.6%.

One final point is that anyone employing this strategy to boost the downside and upside barriers should remember that they’re still just betting on the S&P 500. And in the case of MAXJ, that’s costing you 50 basis points, which is the price of the insurance.

Jeff Benjamin is the wealth management editor at, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.

Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.

Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.