Innovator’s defined outcome ETFs are tools for diversification and management of market risk.

Investors have plowed in $3.2 trillion into hedge funds and $1 trillion into equity-linked structured products, investments that have limited downside protection, according to Bruce Bond, Co-Founder, and CEO, Innovator ETFs. (ETF Trends)

Instead, they could consider an alternative investment strategy that could protect them from a loss shock up to a known buffer value on the one side, but also let them participate in the gains from a rally (up to a cap) on the other.

How it works

Starting with a synthetic 1:1 exposure to the index, the Innovator defined outcome ETF would be layered with a put spread to provide buffers of 9%, 15%, or 30% to the index. This layer would provide the downside buffers. On top of this, the ETF would sell an upside call to finance downside buffers. This last layer sets up the upside cap.

For illustration, in the Innovator S&P 500 Buffer ETF (BATS: BJAN), the ETF suffered only 80% of the S&P 500’s drawdown and experienced 77% of the benchmark’s volatility.

Advantages over other investments

According to Bond, who was participating in a webcast Buffer ETFs to Capitalize on Market Volatility, the Innovator defined outcome ETFs score over other investments as follows:

• Bonds might not provide the downside buffer investors need with credit risk exposures
• Hedge funds charge expensive fees, have underperformed the broad market, and require high minimums
• Shorting the market involves high carry costs, no upside exposure, and trading skills to time the markets well

On the other hand, the Innovator defined outcome ETFs are suitable for risk-averse investors who seek:

• no credit risk
• intra-day liquidity
• no surrender fees
• access on an exchange
• no commissions, and lower fees

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