Innovator plans diversified S&P 500 defined-outcome ETF

May 20th, 2020 | By | Category: Alternatives / Multi-Asset

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Innovator Capital Management has announced plans to expand its line-up of defined-outcome ETFs by introducing a fund that diversifies across all 12 monthly S&P 500 Power Buffer ETFs.

Bruce Bond, Chief Executive Officer of Innovator Capital Management

Bruce Bond, Chief Executive Officer of Innovator Capital Management.

The Innovator S&P 500 Diversified Power Buffer ETF (BUFF US) is expected to begin trading on Cboe BZX Exchange around mid-July.

The fund will be created by repurposing the $100m Innovator Lunt Low Vol/High Beta Tactical ETF (LVHB US).

Innovator’s existing defined-outcome ETFs provide exposure to mainstream equity indices while protecting, or ‘buffering’, the funds against a pre-determined amount of potential losses over a specific outcome period.

The ETFs are linked to indices developed by risk management firm Milliman which consists of FLexible EXchange (FLEX) Options – customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation.

The downside protection comes at the expense of a cap on the potential upside of each ETF over the outcome period. The cap for each fund is set at the beginning of the outcome period and is dependent upon market conditions at that time.

BUFF will track the Refinitiv Innovator Diversified Power Buffer Strategy Index which consists of an equal allocation to each of Innovator’s 12 monthly S&P 500 Power Buffer ETFs, rebalancing semi-annually. The S&P 500 Power Buffer ETFs provide a buffer against the first 15% of losses in the S&P 500 while maintaining upside performance to the predefined cap over a one-year outcome period.

BUFF will be structured as an ETF-of-ETFs and will physically invest in the underlying Power Buffer ETFs to gain its exposure.

Innovator’s intention with BUFF is to offer an ETF that can be allocated to at any point during the year without regard for the outcome period of the underlying ETFs.

The fund, as well as all underlying Power Buffer ETFs, are expected to provide lower volatility, beta, and drawdowns relative to the S&P 500. BUFF, however, allows a smoother exposure to the upside cap limit compared to individual Power Buffer ETFs which are dependant on volatility expectations at fund inception.

Bruce Bond, CEO of Innovator Capital Management, said, “The Innovator S&P 500 Diversified Power Buffer ETF will streamline the process of investing in our revolutionary defined outcome ETFs. We believe BUFF will allow investors to take advantage of the foundation we’ve laid as the pioneers in defined outcome ETFs and the infrastructure that we’ve built in issuing monthly series of the S&P 500 Buffer ETFs.

“With BUFF, Innovator moves closer to our long-term vision of providing a full and diversified suite of defined outcome ETFs for advisors and is consistent with offering investors effective, transparent and scalable risk management tools they can understand in an ETF.”

The fund is expected to list with an expense ratio of 0.99% which consists of a 0.20% management fee as well as 0.79% in acquired fund fees for investing in the underlying Power Buffer ETFs.

Innovator’s defined outcome suite currently houses over $2.7bn in assets under management across S&P 500, Nasdaq 100, Russell 2000, MSCI EAFE, and MSCI Emerging Markets product lines. The suite gathered bumper net inflows in excess of $500m during the Covid-19 market rout in February and March from investors seeking in-built equity risk management.

Bond added, “Recent historically volatile market conditions and the wide range of forecasts for the economic and market climate ahead highlight that having a potential buffer against the market has never been more important.

“Advisors know that the estimated 10,000 Baby Boomers retiring each day don’t want to make their money twice. Reducing risk is crucial to overcoming investors’ worst behavioral tendencies, like selling at the wrong time because portfolios were mismatched with investors’ risk tolerance.

“With BUFF, investors will be able to achieve constant diversified buffered exposure to the S&P 500 Index, locking in new caps as each monthly series resets while decreasing market losses and smoothing out the overall ride in equities.”

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