New Buffer ETF Family Debuts

November 07, 2019

First Trust today is rolling out its own lineup of defined outcome ETFs, a product line that will compete directly with Innovator’s successful array of roughly 25 funds that offer investors downside protection and limited upside. The FT Cboe Vest U.S. Equity Deep Buffer ETF – August (DAUG) and FT Cboe Vest U.S. Equity Buffer ETF – August (FAUG) will cover an outcome period from Nov. 7, 2019, through Aug. 21, 2020, when the performance will reset and new upside caps applied.

Both ETFs come with an expense ratio of 0.85% and list on Cboe Global Markets, the parent company of ETF.com.

“We have for several years now had a structured product distribution team that has focused on distributing structured products for various issuers, and we have come to know there is quite a bit of demand for these sorts of targeted outcome types of products,” said Ryan Issakainen, ETF strategist and senior vice president at First Trust, who also notes that he believes that RIAs will be among the first to embrace these products.

Buffers & Caps

The funds hold a basket of flexible exchange (FLEX) options tied to the SPDR S&P 500 ETF Trust (SPY) and generally aims to reflect the performance of SPY. DAUG can participate in the upside of the index up to a 6.58% gain before expenses and protects against losses of more than 5% and less than 30%. FAUG also participates in the performance of the S&P 500 Index but with an upside cap of 8.6% prior to expenses while protecting against declines up to 10%, according to the funds’ documents.

“Investors have had decent appreciation this year and really over the last decade. There are a lot investors that are concerned about what happens when volatility picks up and what happens when the market has some downside,” Issakainen said of the appeal of the funds.

He noted that the ETFs are likely to appeal to “people who want to participate in the upside but recognize that there’s not a lot of yield opportunities in fixed income right now and are still a little bit leery because of the fact that there has been pretty strong equity returns.”

The new funds are very similar to the defined outcome ETFs that have been launched by Innovator ETFs, with a few key differences. The Innovator funds also hold FLEX options, but they are tied to the performance of the S&P 500 Price Index, and the fund seeks to replicate the performance of that benchmark. The Innovator funds also come with an expense ratio of 0.79%.

The Innovator ETFs further have different downside protection ranges, offering three different buffer choices against losses up to 9%, up to 15% and between 5% and 35%.

The First Trust ETFs that launched today are the initial launch for a suite of products, Issakainen said.

Contact Heather Bell at [email protected]

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