Structured ETFs, which put limits on investors’’ losses and gains, are ripe for mass adoption because of the volatility that rocked the market last year and the threat it may happen again, according to Michael Loukas, CEO and principal of TrueMark Investments, an investment firm that specializes in actively managed ETFs.

TrueMark launched its first structured ETF, which also are known as buffered ETFs or defined outcome ETFs, in July and is launching a new one each month for a year.

Because of market uncertainty and the low interest rates being paid for fixed income, investors want to stay invested in equities but are wary of traditional equities, and structured ETFs can fill that niche, Loukas said.

“Structured ETFs provide a relatively liquid asset that has a low minimum investment level and also mitigates the risk of traditional equities,” Loukas said in a recent interview.

The structured funds offered by TrueMark guarantee no loss will be incurred with a market drop of up to 10%. On the reverse side, the investor takes advantage of 80% to 85% of the upside of the market.

Structured ETFs are relatively new products that have been available for about three years. Most cap the gain in an upside market to a certain percentage, such as 10% or 15%. Loukas said the TruMark structured funds, with no set upside cap, are rare, if not unique, for the product. “We do not want our investors capped out of a growth market and we do not want our clients to be forced to draw down funds during a trough in the market.”

This comes at a time when ETFs in general are seeing some of their best quarters ever. U.S.-listed ETFs attracted more than $500 billion of new inflows for the first time in 2020 as equity markets defied economic data and the migration of assets from mutual funds to ETFs intensified, according to a recent report from State Street Global Advisors. The report showed ETFs had their best quarterly flows ever in the fourth quarter with $188 billion of inflows.

Structured ETFs offered by TruMark can be used by investors of all asset levels, and the product can fit into a portfolio as an alternative or as a core investment, the Loukas said. The TrueMark funds have to be held for 12 months but can then be reinvested in a new offering each year, which is why the firm is launching a new fund each month for a year, he said.

“The structured investment is more predictable than the S&P 500 over the 12-month period,” he added. “The funds accomplish three goals: They allow investors to take on more equity exposure with limited risk; they limit the downside risk, and they provide the investor with peace of mind. The real time examples of deep declines in the market that we saw in 2020 and the continuing world economic uncertainty spark interest in structured products.”

 

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