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Defined outcome ETFs from Innovator see increased inflows


Market volatility in early 2020 has seen close to USD1 billion flow into Innovator Capital Management’s range of Defined Outcome products, designed to offer investors exposure to an index with a cap and a downside buffer limiting potential losses to minus 9 per cent, 15 per cent or 30 per cent.

Bruce Bond, Innovator Capital Management’s co-founder and CEO and former co-founder of PowerShares Capital Management in 2003, launched Innovator in 2017 and his timing with the Defined Outcome products has proved exemplary.

“The end of last year and early this year saw people talking about the bull market and it’s long run and people needed a buffer against potential losses. This has been the bulk of our marketing and January was a tremendous month for us.”

Latest news is that the April series Innovator Nasdaq-100 Power Buffer ETF (NAPR) and Innovator Russell 2000 Power Buffer ETF (KAPR) are scheduled to begin trading, expanding its category-creating Defined Outcome ETF suite to 43 Buffer ETFs in total.

Additionally, the April series of Innovator S&P 500 Buffer ETFs completed their initial outcome period and was reset yesterday, based on the current level of the S&P 500 Price Return Index, receiving new upside caps and downside buffers, from 22 per cent to 15 per cent, for the next one-year outcome period ahead, which concludes on 31 March, 2021.

The firm raised USD1.4 billion last year, and has seen close to that again in just the early months of this year.

“It’s been really good and the first opportunity for us to show how the products work in negative markets since we sold them,” Bond says.”

The products, priced at 0.79 per cent, are available based on a wide range of indices. Taking the example of one of the S&P 500 products, with a 15 per cent buffer and an upside cap over one year, the investor can participate at any time during the year, but after day one the outcome changes a bit, depending on whether it is trading at a premium or discount to the initial offering price. Innovator Capital offers a tool on their website to look at any specific day to determine what an outcome would be at any point during the outcome period.

After a year, the ETF resets as the options expire, giving the investor a new downside buffer and upside cap for the next one-year outcome period. This structure means that the participant will have had access to the performance of the S&P 500 over that year with losses limited to 0 to minus 15 per cent down and access to all the upside to the cap.

“Historically, the ranges will be the highest since we started offering the products a year ago because of the volatility of the market which causes the caps to go up rather than contract – if they expand, it gives you more upside,” Bond says. The current average on a 9 per cent buffer is around 22 per cent of the upside.

The options markets are among the most liquid markets in the world, Bond says, so there has been no problem keeping the structure going with spreads remaining tight.

“People that are coming to us now might have used annuities in the past or may have looked at them in the past but didn’t like the annuity costs and associated structural issues,” Bond says.

Advisers who are familiar with structured products are looking at the Defined Outcome range for people near retirement or in retirement with a fixed portfolio that they are going to live off for the rest of their lives, who don’t want to put their assets into the market unprotected.

“These are aimed at the baby boomer generation and will continue to be used by investors who don’t believe that they can take the amount of risk that equity markets require just to participate.”

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