Pacer ETFs has instituted a new series of products with the launch of a trio of ‘Structured Outcome Strategy’ ETFs on Cboe BZX Exchange.

Sean O’Hara, President, Pacer ETFs.

ETFs in the series will seek to match the returns of a specified reference instrument up to a predetermined cap on the upside, while also offering investors a buffer against market decline to a predetermined point.

The initial three ETFs in the series are referenced to the S&P 500 Index by way of the SPDR S&P 500 ETF (SPY US).

They are the Pacer Swan SOS Moderate (December) ETF (PSMD US), Pacer Swan SOS Conservative (December) ETF (PSCX US), and Pacer Swan SOS Flex (December) ETF (PSFD US).

The funds are actively managed by Swan Global Investments, the funds’ sub-advisor, in line with a systematic rules-based model, and each comes with an expense ratio of 0.75%.

To achieve their defined return profiles, the ETFs invest in FLexible EXchange (FLEX) Options on SPY. FLEX Options are customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation.

PSMD provides protection on the first 15% of SPY’s losses over a period of approximately one year, while PSCX protects against losses between -5% and -30%.

The downside protection comes at the expense of a cap on the potential upside of each ETF over the outcome period. The cap for each fund is set at the beginning of the outcome period and is dependent upon market conditions at that time.

The initial caps on PSMD and PSCX are 12.25% and 9.92%, respectively. Caps are stated gross of fees and expenses.

PSFD, meanwhile, protects against the first 20% of SPY’s losses; however, losses for SPY between -20% and -40% are leveraged by a factor of two – the ETF will decline by 2% for every 1% that SPY declines. The strategy is intended for the ETF’s losses to approach (and ultimately match) SPY’s returns as SPY’s losses approach (and reach) -40%.

The leveraged return on losses between -20% and -40% allows the ETF to maintain relatively greater exposure to potential upside performance. The fund’s initial cap has been set at 18.52%.

Each Pacer SOS ETF has a perpetual structure meaning that once an outcome period ends, a new structured outcome period begins, with the cap and buffer reset.

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

Firstly, due to the time value of the underlying options, Pacer SOS ETFs are likely to exhibit a lower beta than traditional index-tracking ETFs. As such, the ETFs may lag SPY’s performance when markets are trending upwards.

Secondly, investors who purchase shares of a Pacer SOS ETF after the outcome period has begun may be immediately exposed to downside risk in so far as SPY has appreciated since the start of the outcome period (as well as an additional -5% in the case of PSCX).

Sean O’Hara, President of Pacer ETFs, commented, “As we enter the new year with continued market uncertainty, it is important for us to bring our investors a product that offers a more defined outcome, and with that, the potential for a higher degree of confidence. Our Pacer Swan SOS ETF Series offers just that in an easy-to-use wrapper. We feel this will make an excellent addition to our pre-existing fund families and hope that investors see the benefit of owning a strategy like this in their portfolios.”

Micah Wakefield, Director of Research & Product Development at Swan Global Investments, added, “This is an exciting partnership between Swan and Pacer. As experts in hedging options strategies, packaging Swan’s capabilities into defined outcome ETFs is an exciting advancement. Our partnership with Pacer delivers our respective area of expertise from a very capable, combined, end-to-end team.”

Joe Thomson, Founder and President of Pacer Financial, said, “We are actively trying to anticipate the needs of each of our investors and provide them with a strategic investment opportunity that’s suited to evolving market conditions. Our long-term growth has been proven by our ability to meet those needs and we are confident that our addition of the Pacer Swan SOS ETF series highlights our mission.”