MOST BUFFER ETFS ARE PERPETUAL PRODUCTS that are designed to rebalance on the reset date. At the beginning of each outcome period the ETFs are set with defined parameters, a known cap level and downside buffer, typically over a one-year outcome period. At the end of each outcome period the ETF will rebalance into a new outcome period.
The rebalance is simple and consists of the ETF taking the proceeds of the expiring basket of options and reinvesting into a new set of options that will construct the new outcome parameters for the next outcome period. This is all done simultaneously and the rebalance does not create a taxable event.
Expiring options are replaced with new options
At the end of each outcome period (reset date), the four option contracts in the Buffer ETF wrapper expire automatically. The proceeds from the expiring options roll into a new basket of four option contracts for the next outcome period.
The rebalancing is done on the last business day of the month at the end of the outcome period. A package of four option contracts is auctioned off to market makers. The options are packaged together and the highest bid from the market makers determines the cap level for the next outcome period. The cap level is the only variable on the reset date and it’s heavily influenced by market volatility and interest rates.
Considerations:
Index level: The ETFs new defined outcome parameters are based on the traded reference asset price level.
NAV: The ETFs NAV (net asset value) at the end of the outcome period is also the beginning NAV for the new outcome period.
Caps and Buffers: The new caps and buffers are based on the reference asset price level and the ETF’s final NAV.
New Outcome Period Parameters: The new parameters take effect at the close of the last trading day of the outcome period. When the market opens on the first trading day of the new outcome period, the new parameters are already in place.
