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

Investors looking for a unique approach to equity exposure coupled with downside protection mechanisms should consider ETFs designed to offer buffered returns. One such ETF is XJUL (FT Vest U.S. Equity Enhance & Moderate Buffer ETF - July). This article will explore what XJUL is, its pros and cons, and investment strategies related to it.

What is XJUL?

XJUL is an exchange-traded fund (ETF) designed to provide enhanced equity returns while mitigating downside risk. It's part of a suite of ETFs offered by First Trust, known for incorporating buffered solutions to manage volatility.

XJUL aims to track the price and yield performance, before fees and expenses, of the FT Vest U.S. Moderate Buffer Index - July.

Key Features of XJUL

• Enhanced Upside Potential: Investors can benefit from enhanced returns above a predefined benchmark.
• Moderate Buffer Against Losses: The ETF provides a buffer directly associated with a set downside threshold.
• Annual Reset: The ETF resets each July, recalibrating the upside and buffer levels for another year.

These features make XJUL appealing for investors who seek equity exposure but want to manage risk through a structured defensive strategy.

XJUL Composition

XJUL indirectly invests in S&P 500 index components via established contracts that simulate enhanced returns and buffer protection mechanisms. Thus, the fund holds a portfolio of US equities akin to the S&P 500 but integrates elements to provide buffered protection.

Pros of XJUL

Buffer Protection Against Losses

One of the main attractions of XJUL is its protective layer against market downturns. By providing a buffer against losses up to a predefined limit, it enables investors to endure market volatilities with fewer concerns about substantial downturns.

For example, if the market were to decline by 10%, a 9% buffer could mean an investor only experiences a 1% loss.

Enhanced Returns Over Cap

The ETF offers the possibility of enhancing returns above a benchmark index in up markets. This feature means that during bullish periods, investors could receive better-than-average returns.

Peace of Mind

Investors with a low risk tolerance can gain significant peace of mind knowing that their investments have a safeguard against moderate market declines. For those worried about abrupt market fluctuations, XJUL offers a prudent investment option.

Cons of XJUL

Limited Upside Potential

While the buffer feature provides downside protection, it also caps the upside potential. Investors might miss out on extraordinary gains during robust market conditions. If the market outperforms the cap, XJUL might not deliver the full extent of potential gains.

Complexity

The structure of XJUL can be complex for novice investors to fully understand. The mechanism of enhancing returns while offering a buffer may require substantial due diligence and comprehension.

Annual Reset

XJUL's protective buffer and enhanced return features reset annually in July. This yearly reset means that the specifics of the buffer and cap adjust every year, introducing variability dependent on when an investor enters.

XJUL Investment Strategies

For many investors, XJUL can serve specific strategic purposes aligned with balanced risk and growth objectives. Below we outline a couple of common strategies.

Long-term Investment Strategy

XJUL can be an excellent component of a long-term investment plan, especially for those who prefer a balanced exposure to equity markets with built-in risk management. Given its structure, it combines the potential for market appreciation with a level of downside protection, making it suitable for retirement savings and other long-term growth-oriented goals.

Investors can pair XJUL with other diversified holdings to craft a well-rounded portfolio that meets growth objectives while safeguarding against significant losses.

Tactical Allocation

In volatile market conditions or uncertain economic environments, investing in XJUL can serve as a strategic move to manage portfolio risks. It offers focused exposure to the U.S. equities market but with predefined risk management features.

Using XJUL for tactical allocation can stabilize a portfolio by providing downside buffers and enhanced returns, countering volatile periods effectively.

Income and Reinvestment Strategy

While XJUL isn't primarily an income-focused ETF, the returns generated through its structured product can contribute to an investor's overall income strategy. By reinvesting the returns generated, investors can benefit from compounded growth over time.

Integrating XJUL within a broader investment strategy that includes reinvestment can magnify returns while managing risk, achieving growth efficiently.

By understanding its unique features, pros, cons, and strategic applications, investors can harness the benefits of XJUL to navigate equity markets with a reinforced approach to risk and reward management.