Defined Outcome ETF
FINANCIAL TOOL
Defined Outcome ETF
Speaking of defining “enough,” let’s examine a type of investment that protects downside but limits upside.
Some need to make large returns but don’t want to take the risk.
The problem with this is that, even though they need to stay disciplined to an aggressive strategy, their emotions can get in the way. It often leads to timing the market and doing the opposite of what’s optimal: buying high when markets are “good” and selling low when everyone’s scared.
Discipline based on knowledge is key. But it’s easier said than done.
Is there a compromise investment for someone like this?
A Defined Outcome ETF is a strategy that is typically bought for a 12-month period.
There are a number of ways it can be structured, but it typically features some degree of downside protection through the use of option strategies.
Simultaneously, the upside is generally limited to a maximum gain.
Someone totally risk averse could use a strategy that targets complete downside protection, but this is usually going to come at a low upside cap that averages something more akin to a bond strategy (possibly a bit more in good markets).
But if someone’s looking to protect 10% of the downside, or some other range or figure, then this kind of strategy often has outperformed bonds over the long-run.
It can be a useful strategy for someone who wants to see what returns might be made in a relatively short period of time, such as 1-3 years. It buffers against downside loss while offering opportunity for growth beyond the inflation rate.
These strategies are NOT guaranteed to achieve their goals, but they have generally been able to accomplish what they set out to do.
These types of returns will not likely keep up with an all-stock portfolio that is subject to full downside risk, so these are not generally good for long-term strategies.
But they can have their place for particular short- to medium-term goals.
And if it keeps an investor from trying to time the markets, that in itself is enough to make these strategies valuable.
