Innovator launches S&P 500 ‘Managed Floor’ ETF

Nov 15th, 2022 | By | Category: Equities

Innovator Capital Management, known for its suite of defined outcome ETFs, has launched a new fund that seeks to offer uncapped US equity upside while limiting maximum potential loss.

Innovator launches S&P 500 ‘Managed Floor’ ETF

The fund seeks to limit its maximum allowable loss to 10% on an annualized basis.

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

The actively managed fund is 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 SFLR 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, SFLR’s portfolio will consist predominantly of stocks from the S&P 500 with Parametric implementing a representative sampling strategy to closely track the bellwether US equity index while also delivering income through the selected stocks’ dividend distributions.

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 S&P 500, laddered so that one option contract resets each quarter.

In order to offset the cost of the long puts, Parametric sells a series of short-term call options on the S&P 500. 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, SFLR 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, SFLR’s laddered options strategy creates a return profile that is steadier over time. Regardless of when an investor purchases shares of SFLR, 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 of the US equity market (although the fund is expected to somewhat lag the S&P 500, especially in rapidly appreciating markets).

Bruce Bond, co-Founder and CEO of Innovator ETFs, said: “We’re very excited to be working with Parametric to list the Innovator Equity Managed Floor ETF, a core portfolio product that we’ve been brainstorming for some time. SFLR is constructed with stocks and an intelligent options overlay to help investors limit equity market drawdowns while gaining exposure to equities’ dividend income streams as well as their upside potential during strong positive market environments.”

Thomas Lee, CIO of Parametric Portfolio Associates, added: “At Parametric, we believe that managing risk can elevate investors’ expected outcomes over the long term. The disciplined and transparent nature of the option methodology that underpins SFLR can potentially provide a durable and central core holding in many portfolios, able to add true value across a range of market environments.”

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