The First Trust Target Outcome ETFs are actively managed funds that seek to provide shareholders with returns that match the price return of an underlying reference asset, such as the S&P 500® Index, up to a predetermined cap, while also providing a buffer against potential losses in the price return of the reference asset over a Target Outcome Period of approximately one year. The ETFs seek to achieve their investment objectives by investing primarily in FLexible EXchange® Options (“FLEX Options”) that reflect the price return of the underlying reference asset.

There are three components to the ETFs that seek to provide investors with a Target Outcome: the buffer, the cap and the Target Outcome Period. The buffer seeks to limit downside losses (for example, 10% or 25%), while providing upside participation in the return of the underlying reference asset up to a predetermined cap. The buffer and cap are provided if the funds are held for the Target Outcome Period of approximately one year. Once the Target Outcome Period expires, new FLEX Options will be purchased and the buffer, cap and Target Outcome Period will be reset. The outcome may only be realised for an investor who holds shares on the first day of the Target Outcome Period and continues to hold them on the last day of the Target Outcome Period.

FLEX Options allow for customized terms of an option, including strike prices, underlying reference assets and expiration dates. The Options Clearing Corporation (OCC) issues and guarantees settlement of the FLEX Options, becoming the “buyer for every seller and the seller for every buyer,” avoiding counterparty risk.

Each fund will generally hold FLEX Options that reflect the price return of an underlying reference asset, such as S&P 500. The Target Outcome values will be set on the annual “roll date” using a bundle of FLEX Options outlined below. The FLEX Options are fully funded and covered by the bundle including purchased and written put and call options. The table below details the FLEX Options used to construct a sample portfolio with an upside cap of 15%, exposure to S&P 500 and a buffer against the first 10% of losses.

The buffer levels are determined by the type of strategy, from equity buffer (10%) to moderate buffer (15%) and deep buffer (25%). The cap levels are determined by market conditions at the start of the outcome period, factors that drive cap values higher include volatility (higher market volatility typically leads to higher caps), to interest rates (higher interest rates typically lead to higher caps) and dividends (higher dividends typically lead to higher caps).

• Equity Compliment (Mitigate Risk): A common way to reduce downside risk is to reduce an allocation to equities; however, this creates the risk of missing out on potential upside. The ETFs offer an alternative approach that seeks to deliver upside potential linked to equity market performance with reduced downside risk, allowing investors to stay fully invested.
• Hedged Equity Alternative: The risk/return characteristics of the ETFs provide a limited downside buffer while capping some upside potential, similar to alternative investments such as structured investments. As a result, the ETFs may be used as daily liquid, potentially cost-competitive replacements to traditional structured investments while also eliminating counterparty risk.
• Fixed Income Compliment: With the predetermined downside buffer, the ETFs may provide non-correlated returns to equities as well as fixed income securities over a full outcome period. In addition, the ETFs may reduce interest rate risk associated with traditional fixed income securities due to their underlying exposure to the U.S. equity markets.

The First Trust Target Outcome ETFs can be purchased or sold on any day that they are traded on an exchange. Although the cap and buffer levels are fixed at the start of each Target Outcome Period, investors may make intra-period purchases after the start of a Target Outcome Period. Investors acquiring shares of a fund intra-period will likely have a different return potential than an investor who purchased shares at the start of a Target Outcome Period (initial fund launch date or subsequent annual rebalance date). Potential Target Outcome values are updated daily and available on the First Trust website, which provides a tool that shows detailed information about each fund’s current NAV and remaining cap and buffer levels in relation to the initial outcome period values and days remaining in the outcome period. This provides a convenient way to inform investors of their potential Target Outcome values before they invest.

By owning FLEX Options rather than credit instruments, the ETFs do not carry the credit risk of an issuing bank like structured investments or annuities. In addition, FLEX Options are issued and guaranteed for settlement by the OCC. The OCC becomes the buyer for every seller and the seller for every buyer, thus avoiding counterparty risk and allowing the settlement of trades in the event a clearing member fails to meet its obligations. Founded in 1973, the OCC is the world’s largest equity derivatives clearing organisation. It is one of only eight institutions in the United States designated by the government as a Systemically Important Financial Market Utility (SIFMU). This designation requires the company to meet prescribed risk management standards and subjects it to heightened oversight by U.S. regulatory authorities including the SEC, CFTC and Federal Reserve.

No, these ETFs do not mature. The ETFs reset annually on the first day of each new outcome period by investing in a new set of FLEX Options that provide the buffer and cap for the new outcome period. However, the funds may be held indefinitely, providing investors a buy and hold investment opportunity.

An existing shareholder’s outcome will not be impacted by other investors since the strike price of each FLEX Option will remain the same throughout the life of the Target Outcome Period, regardless of the timing or size of creations or redemptions. Additionally, creations and redemptions occur at NAV, therefore not affecting the existing shareholders when intra-period trading occurs.

The ETFs offer the convenience and trading flexibility of a typical ETF, with daily liquidity.