Innovator Capital Management has expanded its suite of ‘Managed Floor’ ETFs – a type of defined outcome strategy that seeks to offer uncapped equity upside while limiting maximum potential loss – with a new fund based on the Nasdaq 100.

Innovator now offers two ‘Managed Floor’ ETFs based on the Nasdaq 100 and S&P 500 indices.

The Innovator Nasdaq 100 Managed Floor ETF (QFLR US) has been listed on NYSE Arca with an expense ratio of 0.89%.

The fund has come to market following a tumultuous two years in the Nasdaq 100, which plummeted 33% in 2022, only to rebound 55% in 2023.

“After the massive market decline in 2022, fear of further losses pushed many investors to the sidelines, where they missed out on the rally in 2023,” said Graham Day, CIO at Innovator Capital Management. “We believe QFLR is a timely solution for investors looking to add Nasdaq 100 exposure, but wanting built-in risk management against large moves downward.”

Investment approach

QFLR is actively managed and sub-advised by Parametric Portfolio Associates, a provider of systematic investment strategies and custom portfolio solutions.

Traditionally, defined outcome ETFs provide upside participation on an underlying reference asset, up to a cap, while protecting or ‘buffering’ against a pre-determined amount of potential losses over a specific outcome period (usually one year). The return profile is established at the beginning of the outcome period by utilizing combinations of customizable option contracts.

While QFLR is also based on a sophisticated options strategy, the ETF will not offer a defined outcome with an exact level of downside protection or a cap on the upside over a specific outcome period.

Instead, QFLR’s portfolio will consist predominantly of stocks from the Nasdaq 100 with Parametric implementing a representative sampling strategy to closely track the pre-eminent growth index.

Parametric will also layer on a custom-developed, laddered options strategy so that the ETF targets a maximum allowable loss of approximately 10% on a rolling 12-month basis. The fund’s ‘managed floor’ is achieved by investing in a portfolio of four 12-month put options on the Nasdaq 100, laddered so that one option contract resets each quarter.

To offset the cost of the long puts, Parametric sells a series of short-term call options on the Nasdaq 100. While Innovator’s existing ‘Buffer’ defined outcome ETFs sell one long-term call contract per annual outcome period, thereby creating a clearly defined investment outcome, QFLR is expected, on average, to sell 78 two-week call options per year. The benefit of selling multiple short-dated calls is the ability to spread out timing risk and reduce the likelihood and effect of getting capped out.

This design aims to solve a common drawback of defined outcome ETFs – that their interim returns may behave notably differently after the outcome period has begun. For example, an investor who purchases shares of a Buffer ETF after the outcome period has begun may be exposed to immediate downside risk in so far as the fund’s reference index has appreciated since the start of the outcome period, and the ETF may offer little to no upside potential for the remainder of the outcome period.

In contrast, QFLR’s laddered options strategy creates a return profile that is steadier over time. Regardless of when an investor purchases shares of QFLR, they can, on average, expect a maximum allowable loss of approximately 10% over the following 12 months, and the ETF will consistently remain exposed to the upside potential (although the fund is expected to somewhat lag the Nasdaq 100, especially in rapidly appreciating markets).

QFLR complements the $130 million Innovator Equity Managed Floor ETF (SFLR US) which delivers the same strategy on the S&P 500. SFLR’s performance since its launch in November 2022 serves as a testament to the strategy’s efficacy. Innovator reports that the fund has captured roughly 80% of the S&P 500’s upside while experiencing 70% of its volatility, all while maintaining the integral safeguard against significant market downturns.