CBOE Vest Financial, an investment manager focused on target outcome investment strategies, on August 25 launched the CBOE Vest S&P 500 Buffer Protect Strategy Fund (BUIGX), the first mutual fund designed to provide investors with index-based buffer protection.
The fund is designed to track the CBOE® S&P 500® Buffer Protect Index Balanced Series (SPRO), providing a risk-managed investment that seeks to protect against some downside losses in the S&P 500 Index, while still participating in potential upside.
The buffer-protection strategy seeks to shield investors from the first 10 percent of a decline in their investment, in exchange for giving up some upside. “We believe that the fund will appeal to investors who want to participate in the broad market but are concerned about risks,” said Steve Neamtz, Senior Managing Director at CBOE Vest Financial. “Our fund is expected to deliver a level of downside protection while still allowing investors to participate in gains, offering a clearly defined risk profile relative to the broad market.”
Although buffer protection strategies have been recognized as useful risk-management tools in the past, the fund is the first index-based mutual fund to make such a strategy available.
Buffer protection also offers advantages to investors by potentially allowing them to avoid the pitfalls of market timing. “This allows investors to stay invested in the broad equity markets during a market downturn, with a ‘safety net’ for that first 10 percent of losses,” Neamtz said. “It may help give investors the confidence to stay in the market rather than wait on the sidelines for things to improve.”
Built to mitigate volatility and help drawdown-sensitive investors stay invested, the Buffer Protect Strategy Fund invests in a series of 12 monthly rolling “tranches” of a “Buffer Protect” option strategy. Each tranche seeks to target, before fees and expenses, returns or losses on the price performance of the S&P 500 Index from the third Wednesday of that month to the third Wednesday of the same month the following year (the “tranche holding period”). In return for the strategy’s 10 percent downside protection, each tranche will provide gains on the index up to a capped level.
The Buffer Protect Strategy Fund’s approach to protective investing is unique when compared with other funds aimed at lowering investors’ risk profiles, in particular low beta or low volatility funds. The fund “uses options with contractual levels of certainty against some losses,” Neamtz added.
“We’re extremely excited to be bringing this product to market because of the multitude of uses it offers for client portfolios,” Neamtz continued. “Investors have been really challenged by the flaws inherent in market timing. We believe this product can serve as a cornerstone tool for advisors and clients to utilize as a core holding, with a definable level of protection and opportunity.”