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Innovator ETFs to launch Defined Outcome Bond ETFs


Innovator Capital Management is planning to bring to market the first Defined Outcome Bond ETFs, marking a new era in bond ETF investing. As interest rates sit near historic lows with both duration and bond prices close to record highs, Innovator says its Defined Outcome Bond ETFs are the world’s first ETFs to provide upside exposure to bonds with built-in downside buffer levels. The ETFs are intended to be a core bond solution in today’s challenging interest rate reality.

On Tuesday, 18 August, the Innovator 20+ Year Treasury Bond 5 Floor ETF – July (TFJL) and the Innovator 20+ Year Treasury Bond 9 Buffer ETF – July (TBJL) are set to list on the Cboe. TFJL will seek to provide exposure to the upside performance of the iShares 20+ Year Treasury Bond ETF (TLT) to a cap and a floor against downside losses in excess of 5 per cent over the outcome period. TBJL will seek to provide exposure to the upside performance of TLT to a cap and a buffer against the first 9 per cent of price losses over the outcome period.

“We’re very excited to bring the benefits of Defined Outcome ETF investing to the bond market and chart another completely new category in the ETF world. Today, advisors are faced with some of the highest risk bond markets in history, which is compelling many to rethink conventional wisdom when it comes to the core of their debt allocations. Institutional investors have several tools to hedge against risks in bonds but advisors have very few. With the listing of these new Defined Outcome Bond ETFs, advisors will have some of the same sophisticated tools available to institutions but in the liquid and tax-efficient ETF structure. We think Innovator’s Defined Outcome Bond ETFs will provide significant potential improvements to all advisors with bond allocations by removing some of their clients’ exposure to the substantial interest rate tail risk. TFJL and TBJL can be implemented as part of a core bond allocation to mitigate downside risk while still maintaining some of the upside performance potential,” says Bruce Bond, CEO of Innovator ETFs.

John Southard, CIO of Innovator ETFs, adds: “With rates approaching zero, bonds are increasingly bought for diversification, not income. But with durations extending and bond risks rising, advisors are now seeking to add a measurable buffer to the ‘safe’ side of their portfolio.”

“For decades, long-term US Treasuries have exhibited a strong negative correlation to equities, especially in periods of stress and negative returns for stocks. This negative correlation to stocks provides a strong case for long-dated US government debt in a portfolio setting. Yet, with more duration comes more volatility, which can make owning Treasuries further out on the curve tough to stomach. This vulnerability is magnified today, with rates in a position where there is a lot more room to move up than down. And with the twin engines of fiscal and monetary policy currently creating money like never before, many worry inflation could materialise substantially over the mid-term. 

“Bonds are hyper-sensitive to interest rate risk. In fact, if rates move back up to where they were at the beginning of the year, core-bonds would lose -9 per cent, and they would fall -17 per cent if rates were to rise to where they were two years ago. Long-term US treasury prices would fall more than -20 per cent if rates went back to January 1st and -34 per cent if rates were to rise to where they were two years ago2. Many investors cannot afford to take this type of risk in their bond portfolios. Yet at the same time, worries are mounting that equity allocations face risks as stock markets continue to look past the biggest economic contraction in our lifetimes, which makes the uncorrelated nature of long-dated US debt too important to forego in a portfolio setting. With Defined Outcome Bond ETFs, Innovator intends to help advisors and investors solve this challenge by providing core bond ETF solutions that seek to limit loss while maximising the potential diversification benefits of the asset class,” concludes Southard.

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