PGIM Investments has expanded its defined outcome investment suite with two laddered ETFs-of-ETFs that diversify across the firm’s US large-cap ‘Buffer’ funds.

Stuart Parker, President and CEO of PGIM Investments.

The PGIM Laddered Fund of Buffer 12 ETF (BUFP US) and PGIM Laddered Fund of Buffer 20 ETF (PBFR US) have been listed on Cboe BZX Exchange.

BUFP targets an equal-weight investment in PGIM’s 12 US Large-Cap Buffer 12 ETFs, each providing exposure to the S&P 500 while protecting against the first 12% of losses over a one-year outcome period. Each of the 12 underlying Buffer ETFs has an outcome period that begins in a different month of the year.

Meanwhile, PBFR targets an equal-weight investment in PGIM’s 12 US Large-Cap Buffer 20 ETFs, each offering exposure to the S&P 500 while protecting against the first 20% of losses over a one-year outcome period.

Both laddered ETFs rebalance back to an equal-weight allocation every quarter.

Each underlying Buffer ETF achieves its defined outcome profile by investing in FLexible EXchange (FLEX) Options – customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation – on the S&P 500.

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 (notably implied volatility) at that time.

At the end of each outcome period, the ETFs do not expire but, instead, rebalance and reset, providing investors with fresh buffers and new upside caps dependent on market conditions at that time.

As the Buffer ETFs have been tailored for their specific outcome periods, an investor may encounter a different risk profile if they invest after the outcome period has begun. For example, investors may be exposed to immediate risk on the downside, and have less potential for upside participation, if the ETF has risen between the beginning of its outcome period and when the investor entered the fund.

Similarly, investors could also be exposed to less downside protection, and greater potential for upside participation, if the ETF has fallen between the beginning of its outcome period and when the investor entered the fund.

These dynamics can present a challenge from a portfolio management perspective. Laddered buffer ETFs-of-ETFs aim to alleviate much of this complexity by offering a strategy that can be allocated to at any point during the year without regard for the outcome period of the underlying ETFs.

By diversifying across the underlying Buffer ETFs, the laddered ETFs-of-ETFs offer a simple means to reduce timing risks over the long term. The rules-based approach does mean, however, that the ETFs will always be invested across their 12 underlying Buffer ETFs even if these funds reach their caps or exhaust their buffers.

Each laddered ETF-of-ETFs comes with an expense ratio of 0.50%, making them the lowest-cost in their category.

Stuart Parker, President and CEO of PGIM Investments, commented: “Laddered buffer ETFs are one of the fastest-growing segments of an already accelerating defined outcome ETF market — but flexibility and accessibility are critical in this space. We’ve seen strong client demand for both the underlying buffer ETFs as well as single-ticker solutions that can provide efficient exposure to this style of investing while reducing some of the operational load of investing in the individual monthly vintages.”