Innovator Capital Management has expanded its line-up of ‘Managed Floor’ ETFs, a defined outcome investment strategy designed to provide uncapped equity upside while limiting maximum potential losses, by launching a new fund tied to the US small-cap Russell 2000 Index.
Uncertainty around the US election and the future trajectory of interest rates could drive volatility higher in equity markets.
The Innovator US Small Cap Managed Floor ETF (RFLR US) has been listed on NYSE Arca with an expense ratio of 0.89%.
The new ETF launches at a time when investors are increasingly allocating more towards small-cap stocks. However, with an upcoming election and uncertainty around the future trajectory of interest rates, Innovator suggests that preparing for potentially heightened market volatility could be prudent for investors.
Graham Day, CIO at Innovator Capital Management, commented: “Many investors and advisors are gravitating towards small caps to diversify their exposure and capture the Russell 2000’s growth potential. However, many more are sitting in cash for fear of a market drop.
“Following a large market decline, it can take years to recover losses even in well-performing segments of the market. With RFLR, investors are able to allocate towards small caps with built-in risk management against large declines. We believe RFLR will serve as a solution for investors aiming to mitigate their risk of volatile swings in small caps and to provide a level of confidence to investors sitting on the sidelines in cash.”
Investment approach
RFLR is actively managed and sub-advised by Parametric Portfolio Associates, a firm known for its systematic investment strategies and customized portfolio solutions.
While traditional defined outcome ETFs offer participation in the upside of an underlying reference asset up to a cap, with protection against a specified level of downside over a set period (usually one year), RFLR takes a different approach. Though it also employs a sophisticated options strategy, it does not provide a fixed level of downside protection or a cap on upside over a defined period.
Instead, RFLR’s portfolio primarily consists of stocks from the Russell 2000, with Parametric using a representative sampling strategy to closely track the index. The key innovation lies in the implementation of a custom, laddered options strategy designed to target a maximum allowable loss between 8% and 12% on a rolling 12-month basis. This “managed floor” is achieved by holding four 12-month put options on the Russell 2000, staggered so that one resets each quarter.
To help cover the cost of these long puts, Parametric sells multiple short-term call options on the Russell 2000. Unlike Innovator’s traditional Buffer ETFs, which sell a single long-term call contract per annual outcome period to create a clearly defined outcome, RFLR employs a more dynamic approach. By selling numerous two-week call options throughout the year, the ETF reduces timing risk and minimizes the likelihood of being capped out on gains.
This design addresses a common drawback of defined outcome ETFs: their return profiles can shift significantly after the outcome period starts. Investors who enter a Buffer ETF mid-period may face immediate downside risk if the reference index has already appreciated, while the remaining upside potential might be minimal.
RFLR’s laddered options strategy, however, aims for a more consistent return profile. Regardless of when shares are purchased, investors can typically expect a maximum allowable loss of around 10% over the next 12 months, with continuous exposure to upside potential, offering approximately 70-80% participation in market gains. This approach ensures more steady performance over time, avoiding the sharp shifts in risk and reward often seen with traditional defined outcome products.
RFLR complements the $440 million Innovator Equity Managed Floor ETF (SFLR US) and $190 million Innovator Nasdaq-100 Managed Floor ETF (QFLR US) which deliver the same strategy on the S&P 500 and Nasdaq 100, respectively. Both of these funds also come with expense ratios of 0.89%.