Structured Product Pioneer Discusses the Reasons for Dramatic Rise in Defined Outcome ETFs

Structured annuities are a category within annuities that are a popular investment vehicle due to their balance of protection and upside, achieved by protecting a portion of downside in return for participation in the upside. They are used for what’s called defined outcome investing.

Structured annuities are also known as buffered annuities, indexed variable annuities, and index-linked variable annuities. The category was created by AXA in 2010 with the title Structured Capital Strategies. Below is a chart I put together from various sources to share dollar asset values of three categories: Bank Issued Structured Notes, Indexed Annuities and Buffered Annuities.

There’s been an increased amount of demand this year for structured products in various formats. For example, defined outcome ETFs, which first appeared on the scene in August 2018 are currently getting a lot of interest by investors given the fact that stock prices are at all time high levels.

A recent article titled, “How Defined Outcome ETFs Work” discusses the recent growth and interest in these products due to increased market volatility in 2020.

“The demand we’ve seen from investors for these funds has been healthy, with the group of more than 70 ETFs pulling in over $2.5 billion in assets under management (AUM) this year. They can be used in portfolios for a number of purposes related to taking some risk off the table. Ultimately, these strategies allow investors to stay in the market when volatility is up because of a built-in “buffer” from market losses.” – ETF.com

Source: Limra, Bloomberg, InvestmentNews

 

In 2017 I launched a product for advisors and their clients to provide options for defined outcome investing in a mutual fund format. I have seen how these product solutions can provide key attributes investors are looking for during many market cycles.

Investors have the flexibility to decide how much downside relative to how much upside and that’s why it’s a category killer.

Prior to Structured annuities, participants could either purchase full protection through indexed or traditional annuities, though with minimal upside (especially in today’s low interest rate environment) or potentially take on full downside risk in the form of variable annuities. Structured annuities do a nice job filling in the gap between fixed indexed annuities and variable annuities in regards to market exposure and protection, while still providing a high level of definition as to exposure.

Educational Video Series on Structured Annuities

For more information on this subject, I wanted to share a two-part educational video series I put together on structured annuities to go under the hood of these products in greater detail. I’ll explore how these products are constructed, and how they’re priced.

  • Under the Hood Part 1: Using Structured Annuities to Hedge Against the Ups and Downs of the Stock Market: Watch Now! 
  • Under the Hood Part 2: The Benefits and Detriments of Structured Annuities, Generally: Watch Now!

Additional Resources:

Lastly, I wanted to share with you a few resources and articles I found helpful for those of you looking for more information on the growth of this marketplace:

  • Global Structured Notes, League Tables: Bloomberg, FY 2019. Click here
  • Buffered Annuities Push Variable Annuity Sales to Three-year High in Q3″: InvestmentNews. Click here
  • S. Individual Annuity Sales, 2019: LIMRA. Click here
  • “Structured Notes: The Secret to Improving your Risk/Return Profile”: Visual Capitalist, December 4, 2019. Click here

I hope you enjoy watching my video series, as well as the resources I provided. I’ve found the conversation for defined outcome investing can be relevant today more than ever when advisors are looking for innovative product solutions to limit the downside.

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Joe Halpern, Portfolio Manager
Joseph (Joe) Halpern is Portfolio Manager of a defined outcome strategy at Catalyst Funds. Mr. Halpern has structured, priced, and traded billions of dollars in structured products, exotic derivatives, and listed vanilla options. Additionally, he has managed trading groups, supervised risk management, and participated in executive-level, firm-wide strategic initiatives for several leading financial institutions. In 2012, Mr. Halpern founded Exceed Holdings, LLC, an investment holding company focused on developing next-generation structured investments. The Exceed entities are collectively referred to by the brand name Exceed Investments.

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