PGIM is tossing its hat into the buffer ETF ring with plans to offer 24 funds, each of which will have an expense ratio of 0.50%, a filing with the Securities and Exchange Commission showed.
The move by PGIM, the global investment management arm of Prudential Financial, comes after BlackRock in late June launched its first buffer ETFs, the iShares Large Cap Moderate Buffer ETF and the iShares Large Cap Deep Buffer ETF, which also have 0.50% expense ratios.
"Yes, I believe these are their first buffer ETFs," said Bryan Armour, director of passive strategies research for North America at Morningstar Research Services, a Morningstar subsidiary, regarding PGIM's filing.
While Innovator Capital Management and First Trust have dominated when it comes buffer ETF assets, most of their buffer ETFs charge at least 79 basis points, Armour said.
"This market segment grew from $158 million to $22 billion over the five years through January 2023," he said. "There's increasing investor demand for these strategies and appetite for downside protection given potential headwinds in the market."
Twelve of the planned PGIM funds will seek to provide investors with returns that match the price return of the SPDR S&P 500 ETF Trust, or SPY, up to a predetermined upside cap while providing a downside buffer against the first 12% of SPY's losses over a one-year target outcome period, according to the filing, which was recorded on the SEC's website as accepted on Sept. 22 and filed on Sept. 25.
Similarly, the other 12 ETFs will aim to provide returns that match the price return of SPY up to a predetermined upside cap while providing a downside buffer against the first 20% of SPY's losses over a one-year target outcome period.
Innovator launched the world's first buffer ETFs in 2018, according to Graham Day, senior vice president and chief investment officer at Innovator.
"It's validating when you've got some of the world's largest financial institutions bringing products that you launched — being first to market — over five years ago," Day said.
"And at the end of the day, what we've tried to do is to disrupt the insurance and the structured note industries that have been really the dominant forces in these defined outcome payoffs for the better part of two-plus decades," he said.
Insurers such as Prudential are realizing that "this is where the puck is moving," Day said.
"It's going to take time for PGIM to be able to build an asset base, and it's easier said than done," he said. "Right now, where we're at — we're at 79 basis points — that's still super competitive given the obstacles that are in PGIM's way."
The size of Innovator's lineup "lends itself to tighter spreads in the secondary market," Day said."So, from a cost perspective, that's something you also have to consider."
PGIM had $1.27 trillion in assets under management as June 30. A PGIM spokesperson declined to comment on PGIM's proposed buffer ETFs beyond the filing.
As of last week, Innovator had slightly more than $15 billion in total assets under management, with defined outcome ETFs accounting for about $14 billion of that, Day said.
