The Defined Outcome exchange traded fund strategy with a built-in buffer may help financial advisors better diversify client portfolios during these more troubled times.
In the recent webcast, Finding Certainty Amid the Global Pandemic – Where can you turn in Today’s Markets?, Bruce Bond, Co-Founder and CEO, Innovator ETFs, outlined the current market environment that has been propped up by central banks, but he also warned investors about the sustainability of such aggressive actions may be in the short-term. The massive stimulus measures have helped equities rebound, with the S&P 500 forward price-to-earnings hovering around 24.9% and the Shiller P/E ratio at 29.8, or near their highest levels since the tech bubble burst.
Along with pricier market valuations, Bond also underscored the brewing political risk ahead as presidential elections are right around the corner. Projections are showing an easy win for Joe Biden and the Democrats, with an expected 90% chance the Biden ticket will come out on top.
In a year where markets have taken investors for a wild ride, traditional defensive equity strategies have more or less failed in 2020. Bond pointed out that for the year-to-date through the end of July, the minimum volatility strategy returned -2.3% with a max drawdown of -33.1%, low-volatility strategy fell -7.1% with a max drowdown of -36.1%, dividend aristocrats dropped -5.0% with a -35.5% max drawdown, and defensive equity declined 1.8% with a -35.7% max drawdown, compared to the S&P 500’s positive +1.2% return and -33.9% max drawdown.
On the other hand, Graham Day, Vice President of Product and Research, Innovator ETFs, pointed out that the Defined Outcome ETFs have helped investors hold up in this more volatile year. For example, the Innovator S&P 500 Buffer ETF (BJAN) returned +1.6% with a max drawdown of -26.3% over the same period.
As a way to better diversify an investment portfolio, investors should consider the benefits of alternative strategies that incorporate an innate hedge to diminish downside risks but still maintain upside potential to capture market moves. Innovator ETFs has come out with a suite of Defined Outcome ETF strategies with a built-in buffer to help investors hedge against further swings ahead, depending on one’s level of risk aversion.
For example, the Innovators August Defined Outcome series includes the Innovator S&P 500 Buffer ETF (BAUG), Innovator S&P 500 Power Buffer ETF (PAUG) and Innovator S&P 500 Ultra Buffer ETF (UAUG), which have a 9%, 15%, and 30% buffer, respectively.