ETF Prime: Islam on Defined Outcome ETFs and More

To begin, Geraci noted that despite the first buffer ETF releasing as recently as 2018, the category is already nearing a $50 billion industry value. Close to 300 funds are available for investment. Geraci then asked Islam to break down how these products have expanded over the last few years. “These strategies are really popular in an uncertain of volatile market,” she noted. Islam then added that uncertainty may be the direction in which the U.S. market is currently heading.

Additionally, Islam noted that defined outcome ETFs can help investors who want to participate in the market instead of sitting on the sidelines. These funds can provide returns and capital appreciation. But they also come with varying degrees of downside protection to mitigate potential risk. Islam observed that, YTD, this category has seen over $9 billion in inflows, highlighting growing interest in these funds and the benefits they offer.

Moving on to defined outcome funds that promise 100% downside protection across the outcome period, Geraci asked Islam what she thinks about these funds in terms of portfolio positioning. In particular, he noted that these funds get pitched as potential fixed income replacements within a portfolio. To better explain how these funds are used, Islam noted that “it’s more about the buffer than about the return.” Elaborating, she noted that these funds help investors participate in the market while mitigating downside. That’s instead of a return-focused money market or fixed income fund.

“These could be a core equity replacement for some investors. I think some investors may would look towards it as a replacement for money market or fixed income. But it’s definitely not the same,” Islam added.

Focusing on investor appeal, Geraci asked Islam why demand has mounted for defined outcome ETFs. In particular, he asked if investor interest is tied to the status of the markets as a whole. Islam agreed that “some of the interest is tied to the market.” She added that demand is likely to keep increasing. Due to the heightened volatility and uncertainty of the current market, defined outcome strategies have worked for investors who are “sort of nervous to get back into the market.”

However, Islam noted that defined outcome strategies carry notable downsides. By requiring investors to hold the fund for the entire outcome period to get the promised results, Islam noted that some structured protection funds can make it more difficult for investors to maneuver their portfolio based on current market movements. Additionally, these funds provide strong protection. But they often come with some degree of cap on potential returns.

“So you’re protecting the downside. But there are many years when you’re not really going to have so much concern about the broader equity market,” Islam added.

To close out this week’s episode, Geraci was then joined by George Milling-Stanley, vice president and head of Gold Strategy at State Street Global Advisors. Geraci highlighted recent results from State Street’s Gold Perceptions Survey. The survey shows 91% of financial advisors in North America intend to do one of two things. They’ll increase allocations to gold within the next year and a half or keep them at the same allocation. Additionally, Geraci noted 29% of advisors intend to increase their allocations to gold over the same time period.

“It’s a very encouraging number that that many people are enthusiastic about gold,” noted Milling-Stanley. Looking at specific products within State Street’s portfolio, he highlighted the SPDR Gold Shares (GLD B), which currently holds over $66 billion in AUM. GLD is seeing strong inflows and State Street’s survey is showing increased demand for gold exposure. So Milling-Stanley expressed belief that investors see value in gold as “a proven diversifier, especially in periods of uncertainty.”

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