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

As the landscape of investment options continues to evolve, innovative financial products like FMAR (FT Vest US Equity Buffer ETF - March) are providing new ways to manage market risks while seeking returns. If you’re looking for an investment that allows you to buffer against potential market downturns, FMAR might be worth exploring. In this blog post, we will delve into what FMAR is, its pros and cons, and some strategies for incorporating it into your investment portfolio.

What is FMAR?

FMAR stands for FT Vest US Equity Buffer ETF - March. This ETF is designed to provide investors with a way to participate in the equity market while simultaneously offering a “buffer” against market downturns.

FMAR achieves this by using a strategy called a “defined outcome” approach, where the ETF caps potential gains but provides a buffer (up to a certain percentage) against losses over a specific period, usually 12 months starting from March.

Key Features of FMAR

• Defined Outcome Strategy: Offers a predetermined buffer against losses while limiting potential gains.
• 12-Month Period: The performance buffer and cap are calculated over a 12-month period starting in March.
• Linked to SPY Performance: The ETF’s performance is related to the SPDR S&P 500 ETF Trust (SPY), but within preset caps and buffers.

The goal of the ETF is to provide an attractive risk-return profile for investors who may be wary of significant market volatility.

FMAR Composition

FMAR incorporates a diversified portfolio aligned closely with the S&P 500 but manages risk through options strategies. Specifically, the fund buys and sells a combination of options to create the buffer and cap framework. This means while it tracks the market performance, it operates within a set band of possible outcomes.

Pros of FMAR

Risk Mitigation

One of the core advantages of FMAR is its ability to mitigate risk. By providing a buffer against market losses (e.g., the first 10% of losses), FMAR allows investors to remain in the equity market with a degree of protection. This makes it an appealing option for those who are risk-averse or nearing retirement but still seek exposure to equities.

Potential for Stable Returns

Although gains are capped, FMAR still allows for participation in equity market growth up to a certain point. For investors, this means the potential for stable and predictable returns over the defined period, adding an element of certainty to their investment planning.

Diversification Benefits

FMAR closely mirrors the S&P 500, offering exposure to a broad array of U.S. large-cap stocks. This provides inherent diversification benefits similar to investing directly in an S&P 500 index fund but with added risk management.

Cons of FMAR

Limited Upside Potential

One of the significant downsides of FMAR is the capped gain. This means that during periods of strong market growth, FMAR investors could underperform compared to those invested directly in the broader market. The cap on potential gains might not appeal to investors looking for high returns.

Complexity

FMAR’s use of options and defined outcome strategies can add layers of complexity. Understanding how these financial instruments work and how they affect the ETF’s performance may require more effort than more straightforward investment options.

Expense Ratio

Defined outcome ETFs like FMAR often have higher expense ratios compared to traditional ETFs because of the costs involved in managing the options strategy. This can slightly reduce net returns for investors.

FMAR Investment Strategies

Given its unique risk-return profile and market position, FMAR requires careful planning and informed decision-making. Here are a few strategies to consider:

Long-term Investment Strategy

FMAR could be a suitable addition to a long-term portfolio, particularly for those nearing retirement age who want to protect against significant downturns. The buffer can help mitigate risks, while still providing moderate growth over time.

Given the structured nature of the ETF, it is crucial to stick to the full 12-month cycle for any invested amount to fully realize the benefits of the buffer.

Balanced Portfolio Approach

For a balanced investment approach, FMAR can be combined with other high-growth, high-volatility assets. This strategy could help in moderating overall portfolio risk without completely giving up growth opportunities. Incorporating a portion of your portfolio in FMAR can allow for a smoother ride during volatile market conditions.

Tactical Allocation

Consider using FMAR as a tactical allocation during periods of high market volatility or uncertain economic conditions. By shifting a portion of your assets into FMAR during these times, you can potentially lower overall portfolio risk and stabilize returns.

Conclusion

FMAR offers a unique investment option for those seeking risk mitigation while still participating in the equity market. Its defined outcome strategy makes it an attractive choice for risk-averse investors or those nearing retirement. However, the limited upside potential and complexity associated with its strategy may not be suitable for everyone. By carefully considering your investment goals and risk tolerance, you can determine if FMAR fits into your overall portfolio strategy.