First Trust has expanded its line-up of target outcome products with the launch of the world’s first ETF offering ‘buffered’ exposure to gold.
First Trust has launched the world’s first Target Outcome ETF referenced to a commodity.
The FT Cboe Vest Gold Strategy Quarterly Buffer ETF (BGLD US) has listed on Cboe BZX Exchange and comes with an expense ratio of 0.90%.
Target outcome ETFs, also known as defined outcome or structured outcome ETFs, provide exposure to an asset up to a pre-determined cap while protecting invested capital against a pre-determined amount of potential losses over a specific outcome period.
The approach has proved fertile territory for ETF developers in recent years with Innovator Capital Management, Allianz Investment Management, TrueMark Investments, and Pacer ETFs all rolling out products in recent years.
So far, the majority of target outcome ETFs have been linked to equity indices, with only lnnovator deviating from the asset class with the launch of a pair of defined outcome Treasury bond ETFs in August last year. BGLD, however, marks the first time the approach has been applied to commodities within an ETF wrapper.
Similar to First Trust’s existing target putcome ETFs, BGLD is actively managed by Cboe Vest Financial, the fund’s sub-advisor, in line with a systematic rules-based model.
To achieve its outcome profile, the fund invests in FLexible EXchange (FLEX) Options – customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation. BGLD invests in FLEX Options on the $70 billion SPDR Gold Trust (GLD US), the largest gold ETP globally.
BGLD holds a portfolio of FLEX Options so as to shield investors from 10% of losses on GLD. Investors purchasing shares of BGLD at the start of its outcome period will be exposed to the first 5% of losses and then buffered against losses between -5% and -15%.
The downside protection comes at the expense of a cap on GLD’s 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 BGLD is 6.10% before fees and expenses.
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. Unlike existing target outcome ETFs, which have outcome periods of one year, BGLD has an outcome period of just three months with the initial period ending on 26 February 2021.
Ryan Issakainen, Senior Vice President, ETF Strategist at First Trust, commented: “Historically, gold has a low correlation to stocks. Investing in gold may be of interest to investors seeking a potential hedge against inflation and currency risk. We believe this ETF, with its innovative and convenient access to gold as well as a protective 10% buffer against GLD losses, will be an effective tool for investment professionals seeking to further diversify their clients’ portfolios.”
Karan Sood, CEO of Cboe Vest and portfolio manager for the funds, added: “Cboe Vest is pleased to work with First Trust to launch BGLD, offering investors access to a growing arsenal of targeted risk management approaches.”
Investors should note that, as the target outcome profile has been tailored specifically for the outcome period, if an investor purchases shares after the first day of the outcome period, they will likely have a different return profile than an investor who purchased shares at 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.