Specializing in retirement planning and personalized investment management.

Defined Outcome Funds

Defined Outcome Funds

There are some newer products, that use options, to offer what’s called a “defined outcome” investment experience.  The defined outcome is not a set return, but rather a variable return within certain parameters.  For example, one fund may track the S&P 500 up to a certain cap (10%) and protects investors against the first 15% of losses over a certain period, usually a year.  Theoretically, here’s how this fund should perform:

S&P 500 Returns Defined Outcome Fund Returns
+20% +10%
+12% +10%
+5% +5%
0% 0%
-5% 0%
-12% 0%
-20% -5%

The above is just an example of one fund. Other funds provide for a higher or lower upside with less or more loss protection respectively. Upon completion of the term, the fund resets, and a new term starts. Since the funds do not “mature” they can be held as a long-term investment. They are structured as Exchange Traded Funds (ETFs) so there is liquidity (can be bought one day and sold the next).

These funds are complex, so it is important to understand all their variables. Some track the S&P 500 (US Large Blend), but others track small-cap and international indices, so we can offer this type of protection in various areas of portfolio.

The protection of a defined benefit fund comes at a cost though. Whereas an S&P fund has an expense ratio of 0.05%, most defined outcome funds charge around 0.80%. Still, if it helps people invest, or stay in a rocky market because they’re more comfortable, then it could be worth it.

Implementation: These are a popular option for risk-averse investors, people who are concerned about a short-term market decline, but yet don't want to miss an upswing, and investors willing to increase stocks, but in a more "risk-managed" way. Their use in our portfolios can vary widely. We might use a small amount within an asset class, split the asset class 50-50 between a core holding and a defined outcome fund, or it may make up the entire asset class.