By Tao Han, Director of Product Management at MerQube.
With the US economy experiencing one of the longest expansions in US history, many market participants and economists have been predicting a retraction. Forecasts of this kind have been surfacing over the past few years, and as we’ve come to learn, they’ve yet to materialize. This has created a “FOMO” (fear of missing out) mindset as the market continues to set new highs in the face of these predictions — even though many investors believe the economy is in the very late stage of the expansion, many feel pressed to stay invested in equities to generate returns.
With this macro backdrop, defined outcome ETFs have grown in popularity in recent years, as evidenced by the healthy inflows since the first fund of this type was launched by Innovator Capital Management. According to data from Morningstar Direct, assets in the Defined Outcome space now approach $25 billion up from $108 million in 2018. Due to this extraordinary success, many asset management firms have recently begun to enter the space, including BlackRock.
“Today, MerQube’s defined outcome index family is used as reference by most of the successful defined outcome ETFs providers.” — Tao, MerQube.
Defined outcome strategies provide a cautious approach to stay invested in risky assets but to factor in the possibility that a market pullback can be anticipated at some point. This is an approach that eliminates the need to time the market precisely. Buffer strategy is one of the most popular defined outcome strategies, and the basic premise of this strategy entails the delivery of the upside performance of an equity market up to a certain cap level, with a defined downside buffer protection amount, over a pre-established outcome period.
MerQube has worked from the outset as the benchmark provider to the asset management firms in this space such as Innovator and Allianz. We have been delighted that MerQube’s proprietary option valuation model has helped enable the launch of a series of defined outcome ETFs. Our combined approach has made strategies that were previously confined to the multi-trillion dollar annuity and structured products markets affordable and easily available to all.
Today, MerQube’s defined outcome index family is used as reference by most of the successful defined outcome ETFs providers. Market participants utilize MerQube’s defined outcome indices to obtain insights through performance back-testing under different market scenarios. For instance, a key element of a Buffer strategy is the Cap, and MerQube’s proprietary option valuation model can provide Cap estimates under various market scenarios for all major equity markets. MerQube’s research and design capability is capable of extending the coverage of defined outcome strategy profiles to allow market participants to efficiently create indices that fit their investment objectives and risk tolerance levels. MerQube’s next generation cloud-based architecture also makes it possible to bring ideas to market faster than ever.
Feel free to contact the team at MerQube if you are interested in discussing our capabilities in Defined Outcome Indices and how we might partner together to enable products in the space.
A version of this article was published on MerQube’s website:
