Innovator unveils S&P 500 buffer ETF for money market investors

Jul 5th, 2021 | By | Category: Alternatives / Multi-Asset

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Innovator Capital Management has expanded its suite of defined outcome ETFs with the launch of the Innovator Defined Wealth Shield ETF (BALT US) on Cboe BZX Exchange.

Bruce Bond, CEO of Innovator ETFs

Bruce Bond, CEO of Innovator ETFs.

Defined outcome investing involves the tailoring of an investment’s risk/return profile over a specific outcome period.

The process involves investing in option contracts, usually to buffer against a predetermined amount of losses over a specific period of time (typically one year).

This downside protection comes at the cost of a cap on upside performance which is determined by market conditions at the time when the option contracts are purchased.

Defined outcome ETFs have soared in popularity over the past few years as they provide investors with an effective means to obtain equity exposure that is aligned with their risk parameters.

The latest ETF from Innovator, however, offers a slight twist to the defined outcome strategy by setting a significant buffer against the first 20% of losses on the S&P 500 over a short-term horizon of just three months.

The ETF obtains this defined outcome profile by investing in FLexible EXchange (FLEX) Options on the price performance of the SPDR S&P 500 ETF (SPY US). FLEX Options are customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation.

The significant buffer over a short outcome period leads to a relatively low cap on upside performance which is set at just 0.70% (before fund expenses) over the initial three-month period ending on 30 September. At the end of each outcome period, the fund does not expire but, instead, rebalances and resets, providing investors with a new upside cap dependent on market conditions at that time.

According to Innovator, the fund’s conservative defined outcome profile makes it a suitable alternative to cash, short-term debt, and core bond strategies.

The ETF does not deliver any income which is not typical of many conventional fixed income investments; however, with bond yields near historic lows, duration extended, and interest rate risk elevated, the fund may draw interest from investors looking to sidestep the negative portfolio impacts offered by the current low yield environment.

Innovator’s research indicates that a 20% buffer on the S&P 500 would have been positive or neutral in 98.8% of the 761 three-month rolling periods between 1958 and May 2021. In periods with drawdowns exceeding 20%, the average loss was approximately 4%.

The ETF comes with an expense ratio of 0.69% per annum (approximately 0.175% per quarter).

Bruce Bond, CEO of Innovator ETFs, said: “Many advisors I talk to today have deep concerns when it comes to bonds. They know bonds come with low yields and historically high interest rate risk but they don’t know of reasonable alternatives for their clients. That is precisely why we created BALT which can help investors diversify their defensive allocations by working to reduce interest rate risk while maintaining a defensive, risk managed posture towards equities. We are excited to bring this product to market and continue innovating on the behalf of advisors and their clients.”

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