Capped vs. Uncapped Structured Outcome ETFs

Structured Outcome.  Defined Outcome.  Target Outcome.  While there are a lot of names for these relatively new funds, they are all trying to accomplish the same thing.  Structured Outcome ETFs aim to give you equity exposure to the markets and also aim to build in a buffer to protect you if the market sells off.

While they may seem complex, how they work is relatively simple.  With a 10% buffer in the S&P 500, you are protected from the first 10% of losses. On the upside, most products are structured to offer capped returns.  That means, they will match the S&P 500 up to a cap and then stop. An exception is the uncapped TrueShares Structured Outcome Series.  It offers a participation rate rather than a cap.  You can see the difference in the outcomes represented by the blue lines in the charts below.

Below and to the right is a standard capped structured outcome return.  When the market is down, it provides a buffer and then participates to the downside.  When the market is up, it participates up to a cap and then stops.

Below and to the left is the uncapped return profile. Returns are similar to the capped structure on the downside with a buffer and then participation. However, when the S&P is up, the uncapped structure continues to participate on the upside as a percentage of the total return. 

In bull markets, the TrueShares Uncapped option doesn’t trail the market the way a capped product does.  However, it is important to remember that investors do not own these products just at the end of each period.  They own them throughout the year in up markets and down.  The difference in the structure of capped vs. uncapped in the interim can have a significant impact that the uncapped TrueShares Structured Outcome series was designed to avoid. 

Trailing in up Markets

In a capped structure, the cap is created by selling a call at the level that is defined as the cap.  It is far out of the money when that cap is established.  When the market goes up, it gets closer and closer to being in the money.  In other words, it becomes more valuable as a short position that weighs down performance of the structure. This problem gets worse as the market rises. How much? We have a perfect example of this in the capped BJUL portfolio in 2020. The chart on the below shows SPY v. Capped BJUL v. Uncapped JULZ.

At the start of this period, the market had bounced off lows from the covid lock down and was only about 10% below the previous highs.  The capped BJUL portfolio reset and got a great cap at 17.1%.  With covid and the world shut down, that cap seemed like a good deal.  It wasn’t.  The market blew through the cap in November and this is why the short call matters so much.  When the market was up 17% on 11/13/20, BJUL was up 9%.  When the market was up 22% at year end, BJUL was up 11%.  Meaning that you needed to wait for 6 more months to potentially ‘earn’ the outcome you expected.  The 17% capped return was yours, but you just had to wait.

Contrast BJUL with what JULZ did.  The expected participation rate was 83%.  On 12/31/20, the S&P 500 was up 21.4% for our period (1 day period difference), and TrueShares was up 16% or 76% of SPY.  Investors were able to receive almost everything they expected in real time when the market was up in 2020.

When the market moves up big, a capped structure can get left behind waiting to realize the expected outcome.  You may have to wait the whole year while the market is running. 

Resetting with Touch Decisions

One of the benefits of ETFs is liquidity.  You can trade them intra period either to get out of the position or trade into the latest reset.  If the market is up, you may decide you want to reset your cap.  A trade into the most recent month will reset the cap and buffer at the current level.  Whatever the reason, a capped product investor must make tough decision with limited good outcomes.  If the market is up and you reset, you give up gains that you have not realized yet because the structure is trailing the market – as we described above.  With the uncapped TrueShares Structured Outcome Product, you don’t face this quandary.  If you want to step up your buffer, you may sell your position and buy the front month.  You will already have realized most of your expected outcome at that point.  

The dilemma is worse when the market is down.  The capped and uncapped structures have similar interim downside performance and face the same issue with realizing the buffer over time.  Investors must wait to realize the full buffer at the end of the period.  The chart below shows Capped BNOV v. Uncapped NOVZ.  Both were down about -3.5% when the S&P 500 was down -5% at the end of Feb 2022.  If the market were to stay there for the rest of the period, investors would see 0% return for both funds.  The difference here is if you decide to reset the buffer in a capped product, you lower your cap.

Again, 2020 gives us an example.  Investors who bought the capped March ETF in 2020 experienced an immediate 1-month sell of -11.8%, as SPY was down -16.1% due to covid’s impact.  It isn’t surprising that some investors wanted to reset their buffer in that market.  The March cap was at 16% initially or around 344 on the SPY.  The BAPR reset cap was 22.00%, so it is a bigger number!  However, the new level was at 314.  When the bounce happened, the S&P 500 blew through 314 in early June.  Resetting with a cap CAPS your recovery. 

If you were in the Uncapped TrueMark Structure, you could have traded to reset your buffer as well, but since your upside is uncapped you could just ride with a different participation rate.

Ladder with Confidence and Flexibility

The issue with market moves and tough decisions we described above can be exacerbated by Laddering.  Many investors and advisors like to put an investment into each fund of a structured outcome series.  When you ladder with a capped product and the market moves, you have all the issues described above, but compounded by 4 quarters or 12 months of investment.  By laddering in the TrueShares Structured Outcome, you can regularly invest in the front of the month to get a recent buffer level. If the market moves and you want to adjust your holdings, you have the flexibility to do that with the Uncapped Structured Outcome ETFs from TrueShares.

Learn more about TrueShares Structured Outcome ETFs at