'This is the only forward-looking product in the marketplace'

First Trust Canada has launched its final quarterly target outcome ETF, the First Trust Cboe Vest U.S. Equity Buffer ETF – May, listed as MAYB.F on the TSX. Having put together a year’s worth of these products First Trust’s head of ETFs, Karl Cheong, says they’ve proven their value as a product with built-in downside protection, that can help assuage client fears and keep them invested.

Cheong says the product, which offers a 10 per cent buffer against losses if held to maturity and is indexed to the S&P 500, is ideally suited for the likelihood of high volatility ahead. As the COVID-19 pandemic abates, Cheong says we’re looking at a major U.S. election cycle which is likely to start triggering the anxiety of already-spooked investors. In such a market, he thinks the MAYB.F’s guaranteed downside protection can keep skittish clients from losing their nerve, and their shirts.

“This has been actually the best environment you can possibly think of to launch this and plot this product,” Cheong says. “Because you have real case examples of markets going down 10%, almost in a day. In this case, in March, the products were falling below 10 per cent, but if you hold it to maturity, which we haven't hit one yet, August being the first one, it'll recover 10 per cent of the amount from that point. I think that's where the true value of holdings for the full outcome and experiencing the full performance profile will show itself. This experience will show advisors what the product can do for them.”

While losses beyond 10 per cent aren’t protected, Cheong stressed that despite the market chaos in March, an S&P 500 index fund bought one year ago would be up or level today. The value of buy and hold investing, he says, has been proven in the market’s bounce back. The worry for advisors is that their clients sold at the bottom of the market, thinking no bounce back was ever going to come. Cheong says he’s heard “horror stories” of clients going totally to cash the day before markets started rebounding. That 10 per cent protection serves as a reassurance, a means of soothing a client’s fears and letting them know that, come what may, a crucial chunk of the principal is protected. That behavioural protection, Cheong says, is enough to keep clients invested and reaping the rewards of a rebounding market.

“We're going through such a knee-jerk market,” Cheong says. “We saw some of the worst returns in history in March and some of the best returns in history in April. This is one of the products that gives investors peace of mind. We’ve been told by advisors that this is the one line item on client statements that they’re least worried about. It helps them remain allocated and it helps advisors manage the client on the behavioural side.” 

May constitutes the final of First Trust’s quarterly target outcome ETFs. Cheong says they’re unique products, offering some of the downside protection and connection to an underlying security as a structured product, but in an open ended, perpetual format that can be bought or sold at any point. It can become a tool in an advisor’s kit, not just a one-time transaction.

Cheong says, as well, that for all the popularity of diversified, ‘low-volatility’ ETFs, these target outcome ETFs are the only products with built in, guaranteed volatility protection.

“This product is a contractual product, it tells you going forward that by May next year what will happen is that we will guarantee you a contractual outcome, have a cap and a buffer at that point,” Cheong says. “So there's no guesswork, and it doesn't rely on any historical correlations of utilities being low volatility when sometimes they’re not. This is the only forward-looking product in the marketplace that can tell investors what to expect.”