Samsung Asset Management announced on the 18th that it will launch Asia's first buffer-type exchange-traded fund (ETF). It is characterized by buffering certain losses (in terms of U.S. dollars) in a declining U.S. stock market while generating certain levels of revenue in a rising market.
On the same day, Samsung Asset Management held a press conference at the Korea Exchange Conference Hall in Yeouido, Seoul, announcing that the 'KODEX U.S. S&P 500 Buffer March Active' ETF will be listed on the 25th.
This product utilizes the 'S&P 500 10% Buffer Index Series' announced by S&P Dow Jones in September of last year as a comparative index. It aims to buffer approximately 10% of the decline (in terms of U.S. dollars) at the end of a one-year outcome period by investing in the S&P 500 index and using options, a derivative financial product.
Kim Sun-hwa, head of the ETF management team at Samsung Asset Management, said, "Over the past 10 years, when the annual revenue of the S&P 500 index was negative, the average decline was around -7.5%. Based on this, we designed a buffering device for a decline of about 10%."
This ETF built a 'buffer' to mitigate losses when the S&P 500 index declines using one-year maturity options. It formed an investment portfolio in the S&P 500 using stocks and futures and set up a buffer structure through the buying and selling of put options.
Costs are incurred when paying for the premium of put options, and to offset this expense, call options (options to buy at a specific price) are selected for sale. The strike price of this call option is referred to as the 'cap.' The cap represents the maximum increase that the buffer-type ETF can pursue if it rises during the one-year outcome period. In other words, a buffer level and maximum increase are predetermined, leading to the revenue structure of the buffer ETF.
Funds that pre-design their revenue structure using options strategies are referred to as 'defined outcome' products. This differs from 'defined income' products, which use options to provide a constant cash flow through distributions, similar to covered call ETFs. Defined outcome products can be advantageous in sideways markets where volatility occurs.
The options that the KODEX U.S. S&P 500 Buffer March Active from Samsung Asset Management will utilize are set to mature in one year and are scheduled for composition on the 21st (U.S. time). At that time, the cap, which is the maximum revenue target of the buffer-type ETF, will be determined based on the option price. Options will be rolled over annually, and the cap level will be adjusted every March based on associated costs.
This product is designed to seek approximately 10% buffering against declines when held from the time of listing in March over a one-year outcome period, and to seek revenue up to the cap level in a rising market. For instance, if this product is held for one year and the S&P 500 index falls by 22% after a year, a 10% buffering effect (in terms of dollars) will be applied, resulting in an actual decline of 12% for the investor. Additionally, if the S&P 500 index declines by 9% and remains within the buffer level, this ETF will aim for a final revenue of 0%.
Assuming the revenue cap is 10%, if the revenue of the S&P 500 index is 9% within the cap after one year, the ETF will reflect this 9% revenue directly. Conversely, if the index rises by 12%, which is above the cap, the revenue will only reach the cap level (10%). Kim noted, "The revenue structure of the buffer-type ETF should consider exchange rate fluctuations separately based on U.S. dollars."
Although this buffer-type ETF has a revenue structure set on a one-year basis, it can be traded at any time due to the characteristics of ETFs that trade like stocks. However, since the option matures in one year and option values can vary over time, investors need to be aware that the revenue structure may differ depending on when they sell.
Samsung Asset Management will provide daily key indicators on its website for the KODEX ETF, including cumulative revenue trends, possible remaining caps until expiration, and remaining buffers.
Im Tae-hyuk, head of the ETF management division, explained, "The KODEX buffer-type ETF launching now is designed with pre-set buffers and cap levels at the end of the one-year outcome period, so before that point, the buffering effect may not be fully realized. It is essential to keep in mind that the buffer and cap levels are pursued towards the outcome period's end date."
Park Myung-je, head of the ETF division at Samsung Asset Management, stated, "Samsung Asset Management quickly recognized the demand from investors wanting to manage downside risk and has prepared the buffer ETF as a new investment solution, launching it as the first in Asia."