This is a defined outcome ETF that gives exposure to a U.S. equity index while using options to protect against a set range of losses. Over a one-year outcome period it cushions a certain amount of decline, and in exchange a cap applies to upside returns. The structure is reset every December.

It suits moderate-risk investors who want to invest in U.S. equities, accept protection against a set range of losses, and live with an upside cap.

It is a passively managed (index-tracking) ETF run by First Trust.

The fund gives exposure to a U.S. equity index and uses an options structure to cushion a set range of losses over the one-year outcome period, and in return it places a cap on upside returns. A new buffer and cap are set each December, and buying partway through the outcome period can change the protection and cap that apply.

• Structure that cushions a set range of losses
• Defined outcome design with an upside cap

Assets under management (AUM) are $438.0M, and the total expense ratio is 0.85% per year.

Compared with other buffer and defined outcome ETFs such as BUFR and BUFD, the main points of comparison are the level of protection, the cap level and the outcome period.

Buffer strategies tend to show returns limited relative to the underlying index in rising markets because of the cap, while in falling markets they cushion a set range and reduce the drawdown. The protection and cap that actually apply depend on whether you enter partway through the outcome period.

Defined outcome products tend to attract inflows from demand for downside protection when market uncertainty rises, and money sometimes moves into this product group when interest in volatility management increases. It is also worth noting that performance varies with the market environment and the outcome period.

Its strength is a defined cushion against losses, while the upside cap, dependence on the outcome period and changed terms for mid-period entry are points to consider.

For direct exposure to U.S. equities without protection, direct alternatives include SPY and VOO, which track the S&P 500, and for a laddered buffer that spreads across several outcome periods, products such as BUFR are also worth comparing. For buffer products with a different start month, products such as GFEB can also be considered. The three products shown in the table, BUFR, BUFD and PJAN, differ in protection level and structure: a laddered buffer, a deep buffer and a buffer with a different start month, respectively. For this ETF, the differentiating factor is its December-based defined outcome buffer structure.

Here are the points to review before investing in GDEC. The downside cushion is attractive, but the upside cap, dependence on the outcome period and limits of the cushion should be checked in advance. It is best to approach the fund only after fully understanding the defined outcome structure.

The cap in strong rallies and large declines that exceed the buffer are the main variables for performance, and buying partway through the outcome period changes the protection and cap that apply. Without a full understanding of the defined outcome structure, you may get results that differ from your expectations.

It is a suitable candidate for moderate-risk investors who want to invest in U.S. equities while being protected against a set range of losses. For investing without protection, products like SPY and VOO fit, and for a defined outcome buffer structure, it is advisable to choose this product after understanding its structure.