Innovator debuts first ‘Buffer’ ETF with 100% downside protection

Jul 24th, 2023 | By | Category: Equities

Innovator Capital Management has unveiled the Innovator Equity Defined Protection ETF (TJUL US), a new type of defined outcome strategy that seeks to fully buffer against any losses in the S&P 500 over the fund’s outcome period.

Graham Day, Chief Investment Officer at Innovator Capital Management

Graham Day, Chief Investment Officer at Innovator Capital Management.

Defined outcome investing refers to an investment strategy that shapes the potential outcomes of a reference asset or index to fit specific protection and return levels over a pre-determined time period, allowing for a more controlled investment experience.

Generally, these strategies involve protecting against a set-level decline in the reference asset or index over a specific outcome period. In exchange for this protection, investors’ upside potential is capped if the reference asset or index rises above a certain threshold.

To achieve their defined outcome profiles, these ETFs typically invest in FLexible EXchange (FLEX) Options – customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation – which are linked to the underlying reference asset or index.

While there are several existing defined outcome ETFs linked to the S&P 500, all of these funds are designed to offer a limited downside buffer, typically between 5% and 30%.

TJUL, however, is the first that seeks to offer 100% protection against declines in the S&P 500 over its outcome period, which is two years. Innovator notes that the ETF’s initial cap on upside performance is 16.62% (before fees and expenses) and the initial two-year outcome period finishes at the end of June 2025.

Similar to existing defined outcome ETFs, TJUL has a perpetual structure meaning that, once its initial outcome period ends, a new outcome period begins with the cap and buffer reset.

Investors should note, however, that, as the defined outcome profile has been tailored for the entire outcome period, this may affect the ETF’s interim returns during the outcome period in two ways.

Firstly, due to the time value of the underlying options, the ETF is likely to exhibit a lower beta than traditional index-tracking ETFs. As such, it may lag the performance of the S&P 500 when markets are trending upwards.

Secondly, the ETF’s buffer is referenced from the start of its outcome period. Investors who purchase shares of the ETF after the outcome period has begun may be immediately exposed to downside risk in so far as the S&P 500 has appreciated since the start of the outcome period.

While these dynamics can present a challenge, Innovator provides full daily disclosure for each of its defined outcome ETFs including the amount remaining before the cap is reached, any remaining downside before the buffer kicks in, and the remaining days in the outcome period.

The ETF has been listed on Cboe BZX Exchange with an expense ratio of 0.79%.

According to Innovator, this new strategy may help investors shift their portfolios for downside risk without having to sacrifice equity market exposure by moving to cash. Additionally, unlike fixed indexed annuities and market-linked certificates of deposits, TJUL does not carry bank credit risk, does not require a minimum investment, and is expected to provide investors with a beneficial tax treatment.

Graham Day, Chief Investment Officer at Innovator Capital Management, commented: “When investors become concerned about market conditions, we see a surge of dollars move into bank deposits, cash, market-linked CDs, and treasuries. We continue to hear that investors are looking for a way to get back into the market without sitting on the sidelines, but that the level of risk is simply too high. Our aim is for TJUL to provide a way for our clients to stay in the market with significant built-in risk management.”

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