Innovator Capital has rolled out a suite of ‘defined outcome’ ETFs on Cboe BZX. Defined outcome investing seeks to target a specific defined payoff profile, with an allowance for a specific defined level of risk, at a specific point in time in the future.
The new Innovator ETFs are designed to protect investors up to a certain level of loss in bear markets.
The suite – three ETFs initially – provides exposure to the S&P 500 index with downside protection levels of 9%, 15%, or 30% over a period of approximately one year.
They are linked to the Cboe S&P 500 Target Outcome Indices developed by risk management firm Milliman, which also serves as subadvisor to the funds.
The downside protection comes at the expense of forsaken upside potential (the cap) of each ETF over the outcome period.
“Every once in a while a product comes along with the potential to change the way we invest,” said Bruce Bond, Chief Executive Officer of Innovator Capital Management. “We are pleased to announce the arrival of one of those products.”
He added: “Through the defined outcome ETFs, we believe that we have solved a key challenge for millions of Americans by providing the ability for people to stay invested in the market, knowing they have upside growth potential and downside protection levels. This is truly innovative, and another first for the ETF industry.”
To achieve the defined outcomes, the funds invest in FLexible EXchange (FLEX) Options on the S&P 500. FLEX Options are customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation.
The ETFs
Innovator S&P 500 Buffer ETF (Cboe: BJUL): Designed to track the return of the S&P 500 (up to a predetermined cap) while buffering investors against the first 9% of losses over the outcome period.
Innovator S&P 500 Power Buffer ETF (Cboe: PJUL): Designed to track the return of the S&P 500 (up to a predetermined cap) while buffering investors against the first 15% of losses over the outcome period.
Innovator S&P 500 Ultra Buffer ETF (Cboe: UJUL): Designed to track the return of the S&P 500 (up to a predetermined cap) while buffering investors against a decline of 30% of losses over the outcome period, from -5% to -35%, before fees and expenses. Investors are exposed to loss between 0% and 5% and over 35% over the outcome period.
The actual cap for each fund will be set at the beginning of any outcome period, and is dependent upon market conditions at that time. The caps vary between approximately 7.5% and 13.5% (net of fees).
The ETFs charge annual management fees of 0.79%.
Holding period
The ETFs may be held indefinitely, with the applicable fund’s 9%, 15% or 30% buffers remaining fixed and associated caps resetting at the beginning of each outcome period (approximately annually).
Innovator intends to issue a quarterly series of each defined outcome ETF to provide investors an opportunity to purchase shares as close to the beginning of their respective outcome periods as possible. Investors will also be able to purchase shares of a previously listed defined outcome ETF throughout the entire outcome period.
Structured outcomes
The ETF are comparable to equity-linked investment strategies used in other product wrappers like structured notes and structured annuities—markets with more than $1 trillion collectively in the US alone. This space has historically been accessed primarily by institutional and high net worth investors. The ETFs open the door to a wider variability of investors, while enhancing liquidity compared to structured notes which do not trade on exchange.
“Innovator defined outcome ETFs can be used as a complement or replacement for equity, fixed income and alternative allocations in investor portfolios,” said John Southard, Innovator’s Chief Investment Officer. “The inherent flexibility of ETFs allow our defined outcome strategies to be used together or alongside other investments in a portfolio, making them an agile tool for risk management and participation in the upside potential of the S&P 500. Today’s listings make defined outcome strategies more easily accessible to all investors, providing new cost-effective safeguards to help effectively weather volatile markets.”