Innovator rolls out diversified S&P 500 ‘Power Buffer’ ETF

Aug 11th, 2020 | By | Category: Alternatives / Multi-Asset

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Innovator Capital Management has expanded its line-up of defined-outcome ETFs with the introduction of a fund that diversifies across all 12 of its monthly S&P 500-linked ‘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) has listed on Cboe BZX Exchange and has been created by repurposing the Innovator Lunt Low Vol/High Beta Tactical ETF.

Innovator’s existing defined-outcome ETFs provide exposure to mainstream equity indices up to a cap, while protecting, or ‘buffering’, invested capital 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 tracks the Refinitiv Laddered 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 is structured as an ETF-of-ETFs and physically invests 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 with all its Power Buffer ETFs, aims 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 dependent on volatility expectations at fund inception.

The fund comes 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.

Bruce Bond, CEO of Innovator ETFs, said, “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.

“As a risk-managed growth engine, we see many applications for BUFF, including within retirement portfolios, target-date funds and model portfolios where BUFF can easily be plugged into an allocation framework to replace a portion of equities, bonds and/or alternatives.”

Innovator’s defined-outcome suite currently houses over $3bn in assets under management across S&P 500, Nasdaq 100, Russell 2000, MSCI EAFE, and MSCI Emerging Markets product lines. The suite has gathered bumper net inflows in excess of $1.2bn year-to-date from investors seeking in-built equity risk management amid the uncertain Covid-19 market environment.

The success of Innovator’s defined-outcome suite has led rival issuers to launch competing products. First Trust has introduced its own Buffer ETFs based on the S&P 500 including its own diversified Buffer S&P 500 ETF.

The FT Cboe Vest Fund of Buffer ETFs (BUFR US) invests equally across four underlying First Trust Buffer ETFs with outcome periods spaced at quarterly intervals and each protecting against the first 10% of losses. BUFR has also listed on Cboe BZX Exchange and comes with an expense ratio of 1.05%.

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