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

As more investors seek ways to protect their portfolios from market volatility and downturns, the FT Vest U.S. Equity Deep Buffer ETF - September (DSEP) offers an enticing option. DSEP aims to provide downside protection while still allowing for potential upside in the market, making it an interesting choice for risk-averse investors. In this blog post, we'll take a closer look at what DSEP is, its advantages and disadvantages, and some strategies for incorporating it into your investment portfolio.

What is DSEP?

DSEP stands for FT Vest U.S. Equity Deep Buffer ETF - September. It is part of a series of ETFs designed to mitigate the impact of major losses in the stock market while still participating in potential gains. This type of ETF is known as a "buffer" ETF because it provides a cushion (buffer) against losses up to a certain percentage.

Key Features of DSEP

• Downside Protection: DSEP aims to provide protection from the first 20% of stock market losses over a one-year period, resetting each September.
• Cap on Gains: To balance out the downside protection, DSEP also has a cap on the gains it can achieve, which varies depending on market conditions.
• Equity Participation: DSEP invests in U.S. equity markets, allowing investors to benefit from potential market gains while offering a form of insurance against major losses.

DSEP Composition

DSEP typically invests in a diversified portfolio of large-cap U.S. stocks, similar to the S&P 500, while utilizing a series of options strategies to achieve the buffer effect. The fund's strategy involves buying protective put options and selling call options to finance those puts, effectively creating a capped return profile.

Pros of DSEP

Downside Protection

One of the primary benefits of DSEP is its ability to protect against significant market declines. Investors are shielded from the first 20% of losses each year, which can be particularly reassuring during periods of high volatility or market downturns.

Participation in Market Upside

While DSEP does have a cap on gains, it still allows for participation in market upside to a certain extent. This means investors can benefit when the market performs well, albeit within the specified cap range.

Diversification

DSEP offers an easy way to diversify an investment portfolio. By investing in a broad range of large-cap U.S. stocks and using options strategies for protection, DSEP can serve as a core holding or a complement to more aggressive investments.

Cons of DSEP

Cap on Gains

One of the trade-offs for downside protection is the cap on potential gains. This can limit the upside for investors during strong bull markets, where traditional equity investments might provide more substantial returns.

Complexity

Buffer ETFs like DSEP can be complex investment vehicles. They use options strategies that may be difficult for some investors to understand fully. This complexity requires a higher level of due diligence and may not be suitable for all investors.

Expense Ratio

Buffer ETFs often come with higher expense ratios compared to traditional index funds. The costs associated with the options strategies and fund management can eat into overall returns, making it essential to weigh these costs against the benefits of downside protection.

DSEP Investment Strategies

DSEP isn't suitable for every investor, particularly those looking for immediate, maximum gains. However, its unique structure provides several strategic advantages for long-term and risk-averse investors.

Risk Mitigation Strategy

For investors who are particularly concerned about market downturns, DSEP can act as a safeguard. By including DSEP in a diversified portfolio, you can enjoy peace of mind knowing that the first 20% of losses are protected each year. This strategy is ideal for conservative investors or those nearing retirement who can't afford significant capital losses.

Complementary Holding

DSEP can also serve as a complement to more aggressive investments. By blending DSEP with traditional equity investments or high-growth tech stocks, investors can achieve a balanced portfolio that benefits from upside potential while hedging against significant downturns.

Long-term Investment Strategy

While DSEP's cap on gains might seem restrictive in the short term, it can still be a valuable component in a long-term investment strategy. Over multiple market cycles, the protection against significant annual losses can help smooth out returns and reduce overall portfolio volatility.

Tactical Allocation

For those with a more hands-on approach to investing, DSEP can be used tactically. For instance, during periods of high market uncertainty or anticipated volatility, increasing your allocation to DSEP can provide added protection. Conversely, when market conditions are more stable, reducing exposure to DSEP can allow for greater capital appreciation potential in other investments.

Conclusion

DSEP offers a unique way to balance risk and reward in your investment portfolio. With its downside protection and participation in market gains, albeit capped, DSEP presents an intriguing option for conservative and risk-averse investors. Understanding the pros and cons and implementing well-thought-out strategies can help you make the most of this innovative investment vehicle. Whether used as a core holding or a complementary piece, DSEP can add valuable protection and diversification to your investment strategy.