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Performance of Defined Outcome ETFs

March 17, 2023 • Posted in Equity Options, Equity Premium

Defined outcome Exchange-Traded Funds (ETF) use complex options strategies that buffer against loss but cap gain to generate a defined outcome for investors over a predefined period. Are they attractive? In their February 2023 paper entitled “The Dynamics of Defined Outcome Exchange Traded Funds”, Luis García-Feijóo and Brian Silverstein analyze average performance of the Innovator Defined Outcome ETF Buffer Series from 2019 through 2021. They also model the performance of the underlying strategy and simulate average outcome during January 2013 through August 2022. They consider three benchmarks: SPDR S&P 500 ETF Trust (SPY); 50% allocation to SPY and 50% allocation to iShares Core US Aggregate Bond ETF (AGG); and, iShares MSCI USA Min Vol Factor ETF (USMV). Using actual and simulated returns for the selected defined outcome ETFs/benchmarks as described, they find that:

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