SNOV Profile
The First Trust Exchange-Traded Fund, known for its SNOV strategy, aims to mitigate losses on shares of the iShares Russell 2000 ETF (ticker: IWM) through a specialized use of options over a one-year period starting in November. The fund primarily employs FLEX options, which are customizable options contracts, to achieve its investment objective. By writing options on the price return of IWM shares, the fund seeks to limit the initial 15% of losses experienced by the ETF, effectively providing a buffer against downturns. This strategy, however, involves forgoing some of the potential upside gains and dividends associated with IWM shares due to the nature of the options contracts used.
The fund's approach is designed to offer investors protection against the initial segment of losses in IWM value, with any declines exceeding 15% resulting in a direct proportional impact on the fund’s value. For instance, if IWM falls more than 15%, investors experience a dollar-for-dollar loss beyond this buffer. The fund’s unique structure necessitates holding shares through the entire target outcome period to realize the intended risk mitigation benefits. This strategic choice is crucial for maintaining the integrity of the fund’s risk management and return objectives.
At the end of each target outcome period, the fund undergoes a reset to establish a new outcome period with a similar buffer level tied to IWM. However, the cap on potential returns may be adjusted based on prevailing market conditions and rates. It is important for investors to consider that the targeted cap and buffer levels are exclusive of the fund’s expense ratio, which could affect overall performance. Therefore, a thorough understanding of the cost structure and potential market impacts is essential for assessing the fund’s suitability.
Actively managed and focused exclusively on FLEX options on IWM shares, the First Trust Exchange-Traded Fund employs a tactical investment strategy aimed at balancing risk and return. The use of FLEX options allows for precise customization to align with the fund's specific risk management goals. Investors should be aware of the need for maintaining investments through the entire outcome period to fully benefit from the fund's protective features and the implications of market fluctuations on the fund’s performance.
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