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

If you're considering a way to buffer your investments from market volatility while still maintaining exposure to large-cap equities, the JUNP ETF could be a fitting choice. This innovative ETF offers a form of protection against losses, making it attractive for investors seeking a balance between downside risk and upside potential. In this blog post, we'll explore what the PGIM US Large-Cap Buffer 12 ETF (JUNP) is, along with its pros, cons, and investment strategies.

What is JUNP?

PGIM US Large-Cap Buffer 12 ETF (JUNP) is an exchange-traded fund that aims to provide investors with a buffer against losses while allowing for a capped level of upside. It utilizes a portfolio of options that track the S&P 500 Index, delivering a defined risk-reward profile that is reset annually.

Key Features of JUNP

• Buffer Against Losses: JUNP provides a 12% buffer on the downside, which means the first 12% of any losses over a one-year period are absorbed by the fund.
• Capped Upside: In exchange for this downside protection, the upside gains are capped at a pre-determined level, which is reset each year.
• Options Strategy: The fund primarily invests in a combination of U.S. Treasury securities, cash equivalents, and options contracts on the S&P 500.
• Annual Reset: Both the buffer and the capped upside are reset each year, offering a fresh start for investors.

JUNP Composition

JUNP’s portfolio involves S&P 500 index options and other collateral to provide both the buffer and the capped upside. The fund holds collateral in the form of U.S. Treasury securities and cash equivalents to support the options strategy.

Pros of JUNP

Downside Protection

One of the most significant advantages of JUNP is its built-in downside protection. The 12% buffer means that the ETF will absorb the first 12% drop in the S&P 500 Index over the course of a year, which can provide some peace of mind for risk-averse investors.

Diversification with U.S. Large-Cap Exposure

JUNP still offers exposure to the S&P 500, one of the most widely followed stock indices, which includes some of the largest and most stable companies in the United States. This allows investors to participate in the long-term growth of U.S. large-cap stocks.

Defined Outcome

JUNP provides a clearly defined risk-reward scenario, specifying both the extent of downside protection and the cap on upside gains. This transparency helps investors understand precisely what to expect over each annual period.

Cons of JUNP

Capped Upside

The primary trade-off for downside protection in JUNP is the capped upside. If the S&P 500 experiences significant gains, the ETF will only provide returns up to the pre-set cap, potentially limiting performance compared to the broader market.

Complexity

The underlying strategy involving options may be difficult for some investors to fully understand. While the outcome is defined, the mechanics behind achieving that outcome are complex, making it less straightforward than traditional equity ETFs.

Lack of Long-term Track Record

JUNP is a relatively new product, so it lacks the extensive long-term performance history of more established ETFs. Investors may find it challenging to gauge long-term reliability and consistency.

JUNP Investment Strategies

Risk Mitigation Strategy

For investors concerned about market volatility and potential downturns, JUNP can serve as a risk mitigation strategy. By incorporating JUNP into a broader portfolio, you can buffer a portion of your investments, reducing overall risk.

Long-term Planning

While JUNP primarily targets short-term annual protection and returns, it can fit into a long-term investment portfolio. This is particularly true for risk-averse investors who are willing to accept capped gains for protection against downturns over consecutive years.

Complementing High-Risk Investments

JUNP can complement portfolios with high-risk investments. By hedging a portion of your investments with JUNP, you can mitigate potential losses while retaining room for growth in other, more aggressive parts of your portfolio.

Conclusion

JUNP offers a unique approach to investing in the U.S. large-cap market by combining downside protection with a capped upside. This ETF can be particularly useful for risk-averse investors or as a hedging tool within a diversified portfolio. However, its complexities and capped returns make it essential for investors to thoroughly understand the product before incorporating it into their investment strategy. If utilized correctly, JUNP can provide a balanced approach to achieving growth while managing risk.