First Trust Launches BUFQ

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First Trust Advisors has announced that it has launched the FT Cboe Vest Fund of Nasdaq-100 Buffer ETFs (Cboe: BUFQ).


The firm writes that  BUFQ is designed to provide equity investors with an ongoing risk management strategy by investing substantially all of its assets in a portfolio of four FT Cboe Vest Nasdaq-100 Buffer ETFs.


BUFQ uses a laddered approach to invest in the Underlying ETFs, which utilise an options strategy that seeks to provide a downside buffer against the first 10 per cent of losses (before fees, expenses and taxes) with upside potential, up to a predetermined cap, based on the price return of the Invesco QQQ TrustSM, Series 1 (QQQ) for a Target Outcome Period of approximately one year.


Unlike the Underlying ETFs, the fund itself does not pursue a defined outcome strategy. The buffer is only provided by the Underlying ETFs and the fund itself does not provide any stated buffer against losses. The fund will likely not receive the full benefit of the Underlying ETF buffers and could have limited upside potential. The fund's returns may be limited to the caps of the Underlying ETFs.


“Today’s launch of BUFQ satisfies a demand from investors seeking a risk-diversified way to participate in some of the upside of tech-heavy QQQ stock holdings, with a level of protection against losses. BUFQ offers exposure to Target Outcome ETFs on QQQ, with a convenient built-in laddered approach that recalibrates a portion of the investment to the prevailing levels of QQQ each quarter,” says Karan Sood, CEO of Cboe Vest. “There has been a steady increase in demand for risk-diversified buffer investments since 2016, when we introduced a laddered portfolio of buffer strategies in a registered investment company. We are pleased to have yet another risk-diversified buffer ETF available for investors,” Sood adds.


The four Underlying ETFs held by the fund each have a Target Outcome Period that resets annually at different quarterly intervals, creating a diversified or “laddered” Target Outcome strategy. Designed for investors looking to use the Underlying ETFs to mitigate risk in the context of asset allocation, a laddered approach can reduce timing risks over the long term, by providing diversification of the investment time period and market level. Depending on when the fund purchases shares of an Underlying ETF, the cap and/or buffer of an Underlying ETF may be exhausted despite utilising a laddered approach, unless the fund buys shares at the beginning of a Target Outcome Period. The relevant Underlying ETF’s cap is reset at prevailing market conditions at the onset of each new Target Outcome Period. The cap for each Underlying ETF’s subsequent outcome period will likely differ from its initial outcome period. Because the fund typically will not purchase shares of the Underlying ETFs on the first day of a Target Outcome Period, it is not likely that the stated outcomes for a Target Outcome Period will be realised or fully realised by the fund.


“Risk management is at the forefront of investors’ minds this year as volatility has surged. We believe this ETF may be an effective tool for investment professionals seeking to maintain an allocation to some of the most innovative companies in the world, while providing some level of downside protection on the underlying ETF holdings,” says Ryan Issakainen, CFA, Senior Vice President, ETF Strategist at First Trust.


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

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