Defined-Outcome ETFs with a Convex Payoff Profile, Part I: Motivation, Construction, Historical Simulation

In this article, the first of a two-part series, we introduce a new type of defined-outcome ETF with a convex payoff profile. These ETFs are designed to deliver better performance during significant market drawdowns and recoveries compared to existing defined-outcome ETFs, which utilize a put-spread collar structure and have a concave payoff profile. Like the current concave defined-outcome ETFs, the convex ETFs offer a defined outcome without requiring an upfront cash outlay. However, unlike the concave ETFs, the convex ETFs provide a downside floor without capping the upside potential. We perform historical simulations to compare the performance of convex and concave defined-outcome ETFs over a long history, as well as during notable market drawdowns and recoveries.