These Hot New ETFs Protect Your Downside…And…Someone’s Taking Out A Patent on Them

October 9, 2019 | Liquid Alternatives, News
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Defined Outcome ETFs from the Innovator stable limit investors’ losses, but also cap their upside returns.

There’s a new category of ETFs out there known as Defined Outcome ETFs. Also known as Buffer ETFs, these funds are seeing a rush of inflows as investors try to shield themselves from market volatility. In so doing, they also look to protect themselves from losses, while keeping open the potential for gains.

A more liquid variety of a structured product, buffer ETFs absorb market losses up to a certain limit. However, on the flip side, they also place a ceiling on the investors’ gains. These ETFs track indices such as Nasdaq 100, Russell 2000, S&P500, MSCI EM, and the MSCI EAFE.

Innovator Capital Management

Since their introduction by Innovator in 2018, these ETFs have caught investors’ fancy and received inflows of $1.38 billion. These are a useful investment during a stretched bull market with the risk of a top.

“We believe the benefits of placing structured outcomes inside a liquid, transparent ETF wrapper are just beginning to be realized by investors, and we are still in the early stages of growth for this area,” said Bruce Bond, CEO of Innovator Capital Management. He was commenting on the initial outcome period for the October series of S&P 500 Buffer ETFs.

Both buffer and cap have a tenure of 12 months, called the “outcome period.”

Buffers options are 9%, 15% or 30%. These are threshold levels beyond which the investor becomes liable for losses. Therefore, if the underlying index falls 11% for a 9% buffer option, investors would lose only 2%.

For example, Innovator’s top-performing fund, the Innovator S&P 500 Buffer ETF January Series (BJAN), had a buffer level of 9% and a cap of 22.3% as on October 9, 2019. With net assets of $23 million, it has an expense ratio of 0.79%.  It is currently showing a fund return of 14.71% and an index return of 16.15%. The remaining cap is 6.61%, and the remaining buffer is 8.83% with downside before buffer being (-) 12.83%.

These products are a “proprietary ‘Defined Outcome ETF’ structure and process is the subject of a protected patent application.”

[Related story: IndexIQ And Nasdaq Dorsey Wright Tie Up to Offer A Liquid Alternatives ETF Model]

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