S&P 500 Cboe Target Outcome Indexes – Investor Applications

Many investments today target speculative returns, with uncertain levels of risk, over an uncertain period of time. While opportunistic, this approach to investing often brings a high degree of uncertainty. Outcome based investing encourages targeting a specific defined payoff profile, with an allowance for a specific defined level of risk, at a specific point in time in the future. Cboe S&P 500 Target Outcome Indexes work differently, by seeking to incorporate defined exposures to the S&P 500, where the downside protection levels, upside growth potential, and outcome period are all defined, prior to investing. This type of approach exhibits many applications for multiple investor types. We explore a few here:

  1. As a Growth Engine: Investors seeking enhanced growth with non-enhanced downside risk may consider replacing a portion of their domestic equity exposure with an Enhanced Growth Target Outcome Index.
  2. As a Risk Management Tool: Managing portfolio risk has historically been accomplished through fixed allocations to fixed income assets in order to meet a long-term risk tolerance level, or through more tactical measures that allocate away from stocks when markets become volatile. With Cboe Buffer Protect Indexes, the implied volatility of the S&P 500 is intended to contribute positively to upside caps. Conversely, in times of low implied volatility, upside caps tend to be lower. This feature is designed to reflect retained investment in the market through all market conditions (regardless of volatility). This is starkly different from most risk management techniques, which reduce equity exposure as volatility increases.
  3. To Meet a Downside Protection Goal: Risk tolerance levels are often established using long-term historical or stochastic volatility data; however, the downside risk investors actually experience over shorter periods may be remarkably different from their expected risk tolerance level. Target Outcome Indexes allow investors to know their downside protection level over an outcome period before they invest.
  4. A Measure of Gap Risk Protection: For many institutional investors, gap risk (the risk of a market movement from one level to another with no trading in between (e.g., the S&P 500 Index dropping substantially from the previous day’s close)) is difficult and expensive to mitigate. Because Target Outcome Indexes provide defined levels of protection over an outcome period, a measure of gap risk protection may be achieved, so long as the relevant investment product tied to the Index is held until the end of the outcome period.
  5. As a Complement to Guaranteed Lifetime Income: A successful retirement often includes multiple sources of income and risk management, which may include guaranteed lifetime income sources such as Social Security, pensions, and annuities. Target Outcome Indexes may be a complement to these income sources, providing liquidity and risk management to a retiree’s investment portfolio that might not otherwise be available.
  6. Take a View on the Market: Investors looking to take a tactical position on the market may often use enhanced growth strategies in modest bull or range-bound market environments that experience normal or elevated levels of volatility, and buffer protect strategies in bear or range-bound markets.

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