Samsung Asset Management is launching Asia's first 'buffer-type' exchange-traded fund (ETF). It is characterized by reducing losses when the U.S. stock market declines and securing profits up to a certain level during a rising market.
On the 18th, Samsung Asset Management held a press conference at the Korea Exchange Conference Hall in Yeouido, Seoul, announcing that the 'KODEX US S&P500 Buffer March Active' ETF will be listed on the 25th.
Park Myung-je, the new head of the ETF division at Samsung Asset Management, emphasized, "The social responsibility of the industry's leading company is to pursue innovation for the benefit of customers. Samsung Asset Management quickly recognized the demand from investors seeking to manage downside risk and prepared the buffer ETF as a new investment solution, launching it as the first in Asia."
This product uses the 'S&P500 10% Buffer Index Series' announced by S&P Dow Jones in September last year as its underlying index. While investing in the S&P500 index, it aims to buffer approximately 10% of the decline (in U.S. dollars) by utilizing options, a derivative financial instrument, based on a one-year outcome period end date.
Kim Sun-hwa, head of the ETF management team at Samsung Asset Management, explained, "Over the past 10 years, when the annual return of the S&P500 index was negative, the average decline was about -7.5%. Based on this, we designed a downside buffer of approximately 10%."
This ETF implements the 'buffer' to offset losses when the S&P500 index falls by buying and selling one-year maturity put options (options granting the right to sell at a specific price). To offset the premium cost paid for buying put options, call options (options granting the right to buy at a specific price) are also sold, and the strike price of these call options is called the 'cap.'
The cap is the maximum upside the ETF can pursue during the one-year outcome period. Assuming the cap is set at 10%, if the S&P500 index return is 9% after one year, the ETF reflects this 9% return fully. However, if the index rises 12%, exceeding the cap, the return is capped at 10%. The cap is adjusted every March according to the option expiration date. The cap for the upcoming year will be announced on the 21st.
Investors should pay attention to the '10% buffer.' If the S&P500 index falls within the buffer level, for example, a 9% decline over one year, the ETF aims for a final return of 0%. If the S&P500 index drops 22%, the 10% buffer limits the actual investor return to -12%. However, to fully benefit from this buffering effect, investors must hold the product for the entire one-year outcome period. Since the option maturity is one year and option values vary over time, selling the ETF before the outcome period ends may result in different return structures depending on the timing of the sale.
Im Tae-hyuk, head of the ETF management division, stated, "The KODEX buffer-type ETF being launched pursues the pre-set buffer and cap levels at the end of the one-year outcome period, so the downside buffer effect may not be fully realized before then. Investors should keep in mind that the buffer and cap levels are targeted at the outcome period end date." He also noted that since the product is designed as a currency-open type, investors should separately consider return fluctuations due to changes in the Korean won's value (exchange rate declines).
Samsung Asset Management will provide daily updates on important indicators such as the cumulative return trend of this ETF, the remaining cap achievable if held until maturity, and the remaining buffer on the KODEX website.
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