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First Trust launches two new allocation-based portfolios of target outcome buffer ETFs


First Trust Advisors LP, an ETF provider and asset manager, has announced that it has launched the FT Cboe Vest Buffered Allocation Defensive ETF (Cboe: BUFT) and the FT Cboe Vest Buffered Allocation Growth ETF (Cboe: BUFG). 

Both funds seek to achieve their investment objective by investing in a portfolio of target outcome buffer ETFs that seek to provide investors with returns (before fees and expenses) based on the price return of the SPDR® S&P 500® ETF Trust (SPY), up to a predetermined cap, while providing a defined buffer against losses of SPY over a target outcome period of one year.

The underlying ETFs invest substantially all of their assets in FLexible EXchange Options (FLEX options) on SPY. FLEX options are customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation. The funds are managed and sub-advised by Cboe Vest Financial LLC (Cboe Vest) using a target outcome strategy or pre-determined target investment outcome.

The portfolio selection process begins with a universe of target outcome buffer ETFs that provide varying cap and buffer levels. Investing in a single underlying ETF limits the potential outcomes to the underlying ETF’s stated cap and buffer over a target outcome period (depending on when the shares were purchased). Alternatively, BUFT and BUFG provide a convenient way to invest in a diversified portfolio of target outcome buffer ETFs and seek to deliver an optimal combination of equity growth participation and a level of downside protection based on current market conditions. 

In allocating the funds’ portfolios among the universe of possible underlying ETFs, Cboe Vest evaluates various factors, including, but not limited to, the remaining upside cap and remaining downside buffer offered by each underlying ETF relative to the others in the universe, the number of days left in each target outcome period, implied market volatility, the current price of SPY, the NAV of each underlying ETF, and the price sensitivity of the underlying FLEX options to price movements of SPY. From this evaluation, five to seven underlying ETFs are selected for each portfolio. The funds’ portfolios will be evaluated on a monthly basis.

Unlike the underlying ETFs, the funds themselves do not pursue a target outcome strategy. The buffer is only provided by the underlying ETFs and the funds themselves do not provide any stated buffer against losses. The funds will likely not receive the full benefit of the underlying ETF buffers and could have limited upside potential. Each fund’s returns may be limited to the caps of the underlying ETFs.
First Trust’s suite of target outcome ETFs, have approximately USD3 billion in total net assets and are among the fastest growing in the outcome-oriented ETFs space. 

“Demand for buffered ETFs has continued to grow, as more investment professionals have come to recognize the compelling proposition these funds may offer for their clients. We believe these new ETFs provide an attractive solution for investment professionals seeking to make the most out of buffered ETFs,” says Ryan Issakainen, CFA, Senior Vice President, ETF Strategist at First Trust.

Cboe Vest is the creator of Target Outcome Investments® and manager of the longest running buffer strategy fund, states the company. 

Karan Sood, CEO of Cboe Vest said, “There is a dynamic balance of upside capture potential and downside buffering inherent in each underlying ETF, that shifts as market conditions change. These two funds, which rebalance monthly, offer a turnkey solution for investors looking to efficiently access a diversified portfolio of underlying ETFs based on target objectives of defence or growth.”

Karan Sood and Howard Rubin, of Cboe Vest, will serve as portfolio managers for the funds. The portfolio managers are jointly and primarily responsible for the day-to-day management of the funds.

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