PGIM, the global investment management business of Prudential Financial, announced the launch of two separate ETF buffer series, or defined outcome investments, that will consist of 24 new funds.

The firm introduced the PGIM U.S. Large-Cap Buffer 12 ETF series and the PGIM U.S. Large-Cap Buffer 20 ETF series, which will be the firm’s first buffer ETFs. The former series will have a 12% buffer complemented with an almost 16% cap, while the latter will have a 20% buffer with a slightly more than 12% cap.

“I think for most people, 12% is a pretty good upside,” said Matt Collins, head of ETFs and vice president at PGIM Investments. “That’s what people are looking for and they’re willing to sacrifice those sorts of lottery ticket upsides if they can be completely protected for most market events.”

Also known as a defined outcome fund, a buffer ETF protects the initial investment against a certain percentage of loss. However, to accommodate that buffer they also have a cap that limits the amount of upside potential for the fund. “What it is trying to do is protect against those more volatile markets, but still give you pretty reasonable upside,” Collins said. 

PGIM will launch a separate ETF from each series at the beginning of every month over the next year. It began this month with the launch of PGIM US Large-Cap Buffer 12 ETF– January (JANP) and PGIM US Large-Cap Buffer 20 ETF – January (PBJA). 

Each ETF will reflect the buffer of their respective series although the caps can change month-to-month and are primarily based on volatility and interest rates, according to Collins.

The cap will remain in place for 12 months at which time, the fund will rebalance, and a new cap will be established based on the market rates at that time. Advisors and investors will have seven days prior to the rebalancing to decide if they wish to keep their assets in that ETF, Collins explained.

“To achieve that cap and buffer, you have to offer an ETF every month,” he said. “We do that because the market environment changes so much.”

The ETFs track the S&P 500 Index and are technically identified as actively managed although Collins explained that they are actually passively managed. However, since there is no index that can be directly tied to a cap and buffer, the SEC requires that the firm label the ETF as actively managed even though it is not.

In terms of their placement within a portfolio, the firm does not see them in a satellite position but as more of a core for many investors, according to Collins. “We do think it is an S&P replacement for investors that want to more narrowly define and understand risk,” he said. “It’s more for investors who want to understand that their downside is highly mitigated outside of extreme collapse in the market.”

PGIM Quantitative Solutions, PGIM’s quantitative equity, multi-asset and liquid alternatives specialist, will sub-advise the ETFs. They will have an expense ratio of 50 basis points making them one of the cheapest one-year target outcome buffer ETFs in the marketplace, according to Morningstar.

The funds will initially be distributed through the independent broker-dealer and RIA channels, with a push into the wirehouses later after the firm works with them to provide education on the products and an explanation of the risk levels of the ETFs, Collins said.

One of the motivations for launching the funds is how simple they are to explain, according to Collins, as most investors will understand what they do compared to some active managers who might provide complex solutions with their funds. Given the simplistic nature of the funds, PGIM has released an eight-page brochure that uses plain and basic language to explain the funds, which the firm is hoping will help easily get the message directly to investors and pre-retirees.