Months following BlackRock's entrance into the market, PGIM has taken a stride toward introducing buffer ETFs. PGIM is in the process of developing 24 funds, each boasting an expense ratio of 0.50%, as disclosed in a filing with the Securities and Exchange Commission (SEC).
Key takeaways from PGIM entry in the buffer ETF arena:
- PGIM is entering the buffer ETF arena with competitive offerings.
- This move comes after BlackRock introduced its buffer ETFs in late June, also with a 0.50% expense ratio.
- Innovator Capital Management and First Trust are key players in this market, with most of their buffer ETFs charging at least 79 basis points.
- Out of PGIM's 24 funds, 12 aim to match the SPDR S&P 500 ETF Trust's price performance with a downside buffer against the first 12% of losses.
- The other 12 funds also mirror SPY's returns but offer a downside buffer against the first 20% of losses.
- As of June 30, PGIM manages $1.27 trillion in assets.
- Innovator has total assets under management of slightly over $15 billion, with around $14 billion in defined outcome ETFs.
This strategic move by PGIM, the investment management arm of Prudential Financial on a global scale, arrived shortly after BlackRock unveiled its inaugural buffer ETFs in late June. These new offerings from BlackRock, namely the iShares Large Cap Moderate Buffer ETF and the iShares Large Cap Deep Buffer ETF, also bear a 0.50% expense ratio.
Bryan Armour, Director of Passive Strategies Research for North America at Morningstar Research Services, a subsidiary of Morningstar, acknowledged PGIM's filing, stating, "Yes, I believe these are their first buffer ETFs."
While Innovator Capital Management and First Trust have held a prominent position in the buffer ETF market, it's worth noting that most of their buffer ETFs charge at least 79 basis points, according to Armour. He elaborated, "This market segment grew from $158 million to $22 billion over the five years through January 2023. There's increasing investor demand for these strategies and appetite for downside protection given potential headwinds in the market."
Out of the 24 PGIM funds in development, twelve are designed to deliver returns matching the price performance of the SPDR S&P 500 ETF Trust, or SPY, up to a predetermined upside cap. Simultaneously, they aim to provide a downside buffer against the first 12% of SPY's losses over a one-year target outcome period. This information is sourced from the filing, which was officially accepted by the SEC on September 22 and filed on September 25.
In a similar vein, the remaining twelve ETFs have a parallel objective of mirroring SPY's price returns up to a predetermined upside cap. These ETFs also offer a downside buffer, covering the first 20% of SPY's losses over a one-year target outcome period.
Innovator Capital Management claimed the distinction of launching the world's pioneer buffer ETFs back in 2018, according to Graham Day, Senior Vice President and Chief Investment Officer at Innovator. Day expressed his viewpoint, saying, "It's validating when you've got some of the world's largest financial institutions bringing products that you launched — being first to market — over five years ago. And at the end of the day, what we've tried to do is to disrupt the insurance and the structured note industries that have been the dominant forces in these defined outcome payoffs for the better part of two-plus decades." He added that insurers like Prudential are recognizing the significance of this trend.
Day also acknowledged the challenges PGIM may face in building an asset base, emphasizing the current competitive environment with a 79 basis points fee structure, despite the hurdles in PGIM's path. He pointed out, "The size of Innovator's lineup lends itself to tighter spreads in the secondary market. So, from a cost perspective, that's something you also have to consider."
As of June 30, PGIM managed assets worth $1.27 trillion. A spokesperson for PGIM declined to comment on the proposed buffer ETFs beyond the filing.
Innovator, on the other hand, reported total assets under management of slightly over $15 billion as of last week, with defined outcome ETFs constituting approximately $14 billion of that figure, as per Day's statement.
Source: Pensions&Investments
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