BlackRock launches two actively managed ETFs with defined protection on the S&P 500 on the LSE

These are so-called ‘buffer’ strategies, which combine exposure to US large-cap equities with a mechanism offering partial or total protection against losses, in exchange for a cap on upside potential.

The two products are:

iShares US Large Cap Moderate Buffer Mar UCITS ETF USD (Acc) – ISIN: IE000AY2ERH5, ticker: TENM, TER: 0.50%.

iShares US Large Cap Max Buffer Mar UCITS ETF USD (Acc) – ISIN: IE000INTB8Q8, ticker: MAXM, TER: 0.50%.

Both funds are domiciled in Ireland, accumulate income and have a base currency of USD. They are listed on the LSE in GBP.

The context: ‘defined outcome’ strategies arrive in Europe with a UCITS structure

Buffer ETFs, also known as defined outcome ETFs, use options contracts to offer investors a predetermined level of protection against market losses over a specific period, typically one year. This product category, already well-established in the US market, is now expanding into Europe with UCITS structures, suitable for distribution across the continent.

With this launch, BlackRock confirms the expansion of its range of Active ETFs in Europe, a growing category that seeks to deliver specific outcomes through discretionary management.

Investment objective and operational mechanism

Both funds share the same basic objective: to track the price return (excluding dividends) of US large-cap equities represented by the S&P 500 Index, applying two variable parameters: an ‘approximate buffer’ against negative performance and a ‘cap’ on positive performance.

The strategy is implemented through the use of derivative financial instruments:

• Unfunded total return swaps: to replicate the performance of the underlying index.
• Listed options: to construct the protection (buffer) and upside limit (cap) profile.

The investment manager has discretion in the selection of investments and is not bound by the composition or weighting of the S&P 500 Index. The index serves as a benchmark for performance comparison, but the fund’s results may deviate significantly from it due to the implementation of the buffer and the cap.

Key differences: Moderate Buffer vs. Max Buffer

The main distinction between the two ETFs lies in the level of protection offered.

The “Approximate Buffer” and the “Upper Limit” are redefined at the start of each Performance Period, which lasts one year. For the “Mar” product, the period begins in March.

Key operational warnings for investors

The fund documentation clearly highlights the essential conditions for the strategy to function correctly:

1. Holding for the entire Performance Period: To achieve the advertised risk/return profile, the investor must hold the fund units from the start to the end of the one-year Performance Period. Investing after the start of the period or selling before its end may result in outcomes significantly different from the fund’s objective, potentially involving full exposure to losses or limited participation in gains.
2. Variability of parameters: The exact levels of the buffer and cap are not fixed. They are calculated at the start of each period based on market conditions and the cost of options. Investors are advised to consult the iShares website for up-to-date values before investing.
3. Use of derivatives and leverage: The use of swaps and options may generate varying levels of market leverage, exposing the fund to risks specific to derivative instruments, including counterparty risk for swaps.
4. Non-absolute protection: Even for the Max Buffer, 100% protection applies only to negative performance of the index from the start of the period. The value of the fund is not protected against losses occurring after the investor enters the period, nor against declines exceeding the buffer level at maturity (for the Moderate Buffer).
5. Active management: The fund is classified as actively managed. The manager has discretion in implementing the strategy, which introduces additional selection and timing risk compared to a passive ETF.

Concluding remarks

The arrival of these two ETFs expands the range of structured instruments for equity risk management available to professional investors and financial advisers in the UK. The UCITS structure and listing on the LSE facilitate access in accordance with the European regulatory framework.

The choice between Moderate and Max Buffer depends on risk appetite and market expectations: the former offers limited protection whilst maintaining generally higher upside potential; the latter sacrifices a larger portion of potential gains in exchange for full downside protection within defined parameters.

As with any complex financial instrument, a detailed understanding of how it works, its costs and operating conditions is an essential prerequisite for informed use within a portfolio