Fuse Blog

Defined Outcome ETFs: A Sleek, Tax-Efficient Alternative to Structured Notes

  • Despite a tumultuous market in 2022, ETFs have sustained a solid level of demand, bringing in $331 billion through July. More intriguing has been the evolution of defined outcome ETFs, which construct structured payouts using derivatives within the tax-efficient ETF wrapper.
  • In addition to minimizing downside risk, defined outcome ETFs provide a way to add exposure to alternatives in a portfolio as well as achieve better returns than lower yielding fixed-income instruments. Investors can buy and hold the ETF while the underlying contracts reset at the end of the contract term, without having to open new positions as is the case with structured notes.
  • Defined outcome ETF AUM has grown to more than $12 billion as more advisors learn how to implement defined outcome ETFs as part of a client’s broader financial strategy.
  • Innovator ETFs and First Trust primarily dominate the market at this time, but it is likely that other competitors will seek to penetrate the market and expand their product lines in order to drive more demand.

Defined Outcome ETF Assets and Net Flows ($Million), 2018-1H22

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Source: FUSE Research Network, Morningstar