What is DMAR? (Pros, Cons, and Strategies)

As the investment landscape evolves, many seek ways to hedge against market volatility while achieving stable, long-term returns. One such investment that caters to these needs is DMAR, the FT Vest US Equity Deep Buffer ETF - March. Today, we will delve into understanding DMAR, examining its key features, pros and cons, and strategies for investors.

What is DMAR?

DMAR stands for FT Vest US Equity Deep Buffer ETF - March, part of a suite of Define Outcome ETFs provided by First Trust. This ETF aims to provide investors with exposure to the U.S. equity market while offering a buffer against losses during downturns.

DMAR seeks to track the performance of the S&P 500, but it incorporates a structure that provides a clear buffer mechanism. Specifically, it shields investors from the first 25% of losses over a defined one-year period starting each March. This unique feature makes DMAR an attractive option for risk-averse investors looking to participate in the equity market without taking on full market risk.

Key Features of DMAR

• Buffered Exposure to the S&P 500: DMAR offers exposure to the S&P 500 with a capped upside to accommodate the defined buffer.
• 25% Loss Mitigation: It provides protection against the first 25% of declines in the S&P 500 during its outcome period.
• Outcome Defined Periods: The ETF resets annually every March, offering a fresh buffer and upside cap for the new outcome period.

DMAR Composition

Unlike traditional ETFs solely focused on dividend-paying or growth stocks, DMAR uses a combination of options contracts to achieve its defined outcomes. The composition includes:

• Equity Positions: Exposure to a broad range of S&P 500 stocks.
• Options Contracts: Utilization of options to create the buffer and cap mechanisms, primarily protective puts and sold calls.

Pros of DMAR

Risk Mitigation

One of the most compelling features of DMAR is its ability to mitigate risk. By buffering against the first 25% of losses, DMAR offers substantial protection against market downturns. This can be particularly appealing for conservative investors who are wary of market volatility but still want equity exposure.

Defined Upside

DMAR's defined outcome strategy provides transparency about what investors can expect over each one-year period. Knowing the buffer and the capped upside helps investors plan better and align their investment goals with the ETF's structure. This predictability can alleviate some of the uncertainty inherent in stock market investments.

Annual Reset

The ETF's structure resets each March, meaning investors get a fresh buffer and potential upside annually. This feature can be advantageous for those looking to roll over their investments yearly without worrying about long-term market fluctuations.

Cons of DMAR

Capped Upside Potential

While the buffer provides downside protection, DMAR also caps the upside to finance the protective features. This means that in roaring bull markets, your returns will be limited compared to traditional, non-buffered ETFs. Therefore, DMAR is not the ideal choice if your investment strategy focusses on maximizing capital gains during upward market trends.

Complexity

DMAR's structure is more complex compared to traditional ETFs. The use of options contracts to create buffers and caps may not be easily understood by all investors, necessitating a learning curve to fully grasp the investment mechanism. This complexity might also lead to performance that differs from simpler ETFs tracking the S&P 500 directly.

Expense Ratio

Buffered ETFs, including DMAR, tend to have higher expense ratios than more straightforward index ETFs due to the cost of implementing the buffer strategy. The increased expense can impact net returns over the long run, potentially diminishing the benefits of the buffer.

DMAR Investment Strategies

Investing in DMAR requires careful consideration due to its unique structure. Here are some strategies to maximize its benefits:

Long-term Buffer Strategy

DMAR is particularly suitable for long-term investors who want to mitigate downside risks. Given its annual reset, maintaining a long-term holding allows investors to benefit from the periodic buffer and protect their portfolios from sustained downturns. This strategy aligns with retirement planning, providing both equity exposure and reduced risk.

Tactical Allocation

DMAR can be an excellent component of a tactical asset allocation strategy. In periods of high market uncertainty or anticipated volatility, investors can increase their allocation to DMAR to mitigate downside risks. Conversely, during bullish phases, reallocating to more aggressive growth-oriented ETFs can maximize returns.

Balanced Portfolio

Incorporating DMAR into a broadly diversified portfolio can enhance overall risk-adjusted returns. By balancing DMAR with other asset classes like bonds, traditional equity ETFs, and alternative investments, investors can create a more resilient portfolio that can withstand various market conditions.

Maximizing the Annual Reset Feature

Investors can capitalize on the annual reset feature by aligning their investments with the ETF's timeline. By investing close to the reset date in March, you can ensure your exposure is protected by the new buffer, and you can reassess each year to decide if continuing with DMAR fits your strategy.

Conclusion

DMAR provides a balanced approach to equity investments, combining potential growth with a level of risk mitigation not found in conventional ETFs. Its unique structure, featuring annual buffers and defined upsides, makes it a viable option for conservative, long-term investors. However, the capped upside and relative complexity should be carefully considered in the context of your overall investment strategy. Embracing DMAR as part of a diversified portfolio can offer stability and reduce anxiety during turbulent market periods, ensuring a more comfortable investment journey.