NEW YORK / LONDON (IT BOLTWISE) – A new generation of ETFs, the so-called outcome-based ETFs, promises investors a clearly defined risk-reward profile. These products combine classic ETFs with professionally managed options strategies to cushion price declines and participate in moderate market profits.
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The financial world is currently experiencing an exciting development with the introduction of outcome-based ETFs, also known as defined outcome ETFs or buffer ETFs. These innovative investment products offer investors the opportunity to manage their investments in a targeted manner by offering a clearly defined risk-reward profile. In contrast to conventional ETFs, which simply track an index, outcome-based ETFs combine classic ETF structures with professionally managed options strategies. The aim is to cushion price declines within certain limits and at the same time participate in moderate market profits.
Since their introduction in 2018, outcome-based ETFs have developed rapidly. According to BlackRock data, these products now manage around $180 billion in assets. The growing popularity of these ETFs is closely linked to the market uncertainty of recent years as investors increasingly look for predictable outcomes. BlackRock predicts that the volume of these ETFs could grow to around $650 billion worldwide by 2030.
The way outcome-based ETFs work is based on two central building blocks: an index representation, usually of the S&P 500, and an options strategy that limits returns but can reduce losses. Depending on the objective, providers differentiate between three basic types: income ETFs, which generate regular income, buffer ETFs, which are intended to compensate for losses, and growth ETFs, which disproportionately reflect moderate market gains. These constructions usually have a duration of one year, which means that investors who remain invested until the end can benefit from the defined protection mechanisms.
Although outcome-based ETFs offer many advantages, they are not suitable for every investor. Although they can help reduce losses in weak market phases, they often result in significant returns in boom times. In addition, there are comparatively high fees and the waiver of dividends. Investors who wish to invest in these products should therefore thoroughly understand how they work and consider whether they are suitable for their personal situation.
Overall, outcome-based ETFs offer an interesting opportunity to make a portfolio more robust and to withstand fluctuations better. They give investors the opportunity to specifically manage their risks and make certain outcomes more predictable. However, they are not a replacement for broad index funds and should be used carefully.
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