The Defined Outcome Indexes use exchange traded options to provide a standardized and simplified alternative to structured notes, which are powerful defined outcome strategies typically only available to institutions and high net worth individuals. This groundbreaking index family aims to provide the transparency of an index with the flexibility and definition of a structured note.
These indexes provide a defined level of protection and upside participation on the S&P 500, offering solutions for conservative, moderate and aggressive investors seeking S&P 500 exposure:
- The Nasdaq Exceed Defined Protection Index (EXPROT) tracks a portfolio with a targeted maximum equity downside exposure of 12.5% and offers potential upside participation capped at roughly 15%
- The Nasdaq Exceed Defined Hedged Index (EXHEDG) tracks a portfolio with a targeted 10% protection against initial downward moves with geared 150% upside participation up to a maximum cap
- The Nasdaq Exceed Defined Enhanced Index (EXENHA) tracks a portfolio with a targeted 100% participation on declines and a 200% geared upside subject to a maximum cap
Each index tracks a portfolio of exchange- traded options that provides a structured product-like defined exposure to the S&P 500, as well as a portfolio of short term investment grade securities that collateralize the options. On a quarterly basis, the index rebalances roughly 25% of the options portfolio in order to align the index with its targeted exposure. Through this family of indexes, Exceed and Nasdaq aim to offer investors greater control over their investment exposures.
This index-based strategy also seeks to resolve the issue of illiquidity, transparency and concentrated credit risk inherent in structured notes; it will also be easier to incorporate within model portfolios.
An example of defined outcome investment follows, demonstrating the altered risk/reward tradeoff that these strategies offer.