Asymmetric Investing – FAUG

First Trust has launched a series ETFs providing buffered exposure to SPY as of their target “maturity dates” in November (DNOV, FNOV), February (DFEB,FFEB), May (DMAY, FMAY) and August (DAUG, FAUG). I write today about the August series, focusing first on FAUG with a “maturity date” of August 21.

As background, the return caps and buffers of these ETFs re-set each year. I do not like these ETFs as longer term investments. If you hold for the entire year, you pay the full expense ratio. In addition, dividend bleed from the underlying asset (SPY) reduces the buffer and makes the cap harder to achieve.

However, with two months to “maturity,” all the SPY dividends and most of the expense ratio has been paid. At this stage, these ETFs can offer asymmetric opportunities in your favor.

Nitty Gritty

SPY just went ex-dividend on Friday, so let’s look at where FAUG stands. SPY closed Friday at $308.64. If SPY trades above $333.51 on August 21, then FAUG will be capped at $32.68. FAUG closed Friday at $30.43, so if SPY gains 8.05% or more between now and August 21, FAUG will gain 7.42% less any remaining fund expenses (so net 7.27%). In other words, FAUG will participate nearly 1:1 for any gains between now and maturity up to the cap.

If SPY falls anywhere from $307.00 to $276.39 on August 21 (a potential decline of up to 8.96%), FAUG will trade at $30.10 on maturity or a loss of 1.08%. FAUG can only lose more than 1.08% if SPY falls below $276.39. In that case, FAUG will participate in ALL of SPY’s losses and the buffer is negated.

Summary

So if you think SPY will trade between 8-9% either way from its current level in two months, then FAUG currently offers a way to participate in nearly all of the upside potential while avoiding the majority of the downside risk.

You lose out on gains if SPY goes on a tear and gains 20% to the upside. And you lose the buffer protection entirely if SPY tanks more than 9% to the downside.

For those looking for deeper buffer protection, we’ll discuss DAUG in the next article.

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