(Bloomberg) -- BlackRock Inc. is tapping into a fast-growing corner of the options-powered ETF world with an offering aimed at Wall Street investors bracing for the S&P 500 to tread water.
The iShares Large Cap Accelerated ETF (ticker TWOX) launched Thursday. If stocks notch a gain over the quarter the ETF will offer double the gains of BlackRock’s S&P 500 tracking fund (IVV) — but for the current period those returns are capped at 5.82% after fees. That limit will reset quarterly based on pricing in the options market and, in the event of a selloff, the fund comes with no hedges against losses.
The new ETF joins a booming category — more generally known as outcome-oriented, defined-outcome or buffers — that has exploded to $60 billion from just $5 billion five years ago, data compiled by Bloomberg Intelligence show. TWOX is purely focused on squeezing out extra gains in the event that the S&P 500 posts paltry returns, a rare occurrence in recent years.
As is typical for such ETFs, investors in TWOX are only promised the full protection if they keep their money in the fund for its entire lifespan of a quarter. From there, investors can redeem their shares or roll them into the next cycle. The regulatory filing cautions investors the outcomes sought by the fund are not guaranteed.
All in, the world’s largest asset manager is tapping into Wall Street fears that the era of sudden stock melt-ups is over for now, offering a relatively a cheap way to improve equity returns with a fledging trade.
“A lot of investors are worried we might not see the same returns going forward as we have in the past,” said Bob Hum, US head of factor and outcome ETFs at BlackRock. “This is a great product for investors that are worried about more muted returns.”
Since the launch comes in the middle of the month, BlackRock says the first outcome period will be shorter than a full quarter. From there, investors can redeem their shares or roll them into the next cycle. The regulatory filing cautions investors the outcomes sought by the fund are not guaranteed.
This is the first product in BlackRock’s so-called accelerated suite, though it currently has 11 such products in the outcome space including a mix of buffer and buy-write ETFs, among others. Peers, like Innovator Capital Management which already has a series of ETFs with various pre-determined caps, offer similar strategies.
“It’s always noteworthy when BlackRock jumps in,” said Athanasios Psarofagis, a BI ETF analyst. “We definitely see a bigger push of using derivatives in ETFs. The ETF arena is just becoming more complex.”
That complexity raises questions on such a fund’s utility, especially for mom-and-pop investors.
“I would question the practicality of it,” said Todd Sohn, ETF strategist at Strategas. “Navigating markets is already difficult as is, and it may be a struggle for certain investors to want to maintain 2X equity exposure over a long period of time, or to know when to trim this type of product from their portfolio, and without the protection of a downside buffer.”
Regardless, assets in ETFs of a similar nature have surged since Innovator launched its first such fund in 2018. The likes of Fidelity Investments and Allianz SE followed with their own offerings. The structured-outcome category has seen inflows just about every month since December 2020, BI-compiled data show. Even the University of Connecticut’s endowment has recently turned to buffer ETFs after selling almost all of its hedge fund exposure during the most recent fiscal year.
The novel idea is emblematic of the product machine that Wall Street issuers have evolved into as they seek to churn out instruments in the saturated $10 trillion US ETF universe. Last year saw more than 700 funds debut, the second-consecutive year of record launches.
--With assistance from Vildana Hajric and Emily Graffeo.
