The Accelerated exchange traded fund strategy can help investors bolster their equity upside potential without relying on leverage.
In the recent webcast, How to Potentially Accelerate Your Equity Gains, Wes Matthews, director of portfolio solutions at Milliman Financial Risk Management; and Graham Day, vice president of product and research at Innovator ETFs, explained that the Innovator Defined Outcome ETFs offer defined return and risk parameters, easy access, ample liquidity low cost, transparency, and tax efficiency.
The Defined Outcome Tools help investors meet the challenges of today’s markets, especially with elevated P/E levels, which historically translate to lower future returns. Specifically, Innovator argued that investors should be prepared for single-digit 10-year forward returns given current elevated valuations in the equities markets.
The strategists highlighted Innovator’s Accelerated ETF suite as a means for investors to enhance their market exposure. The Accelerated ETFs seek outperformance and prepare investors for low-to-moderate future returns. They come with a capped upside, 2x to 3x upside potential but a 1x downside risk.
The first Accelerated ETFs seek approximately 2x the S&P 500 ETF, to a cap, with a one-to-one downside. They try to provide the outperformance of a benchmark, to a cap, without increased downside risk and provide a defined outcome for investors. It should be noted that these strategies are not leveraged.
For financial advisors, these Accelerated ETFs allow for known outcome potentials prior to investing, don’t take on added risk to chase returns, help clients achieve target returns, and offer long-term solutions.
For example, investors can look to the Innovator US Equity Accelerated ETF – April (XDAP), the Innovator US Equity Accelerated 9 Buffer ETF – April (XBAP), the Innovator US Equity Accelerated ETF – Quarterly (XDSQ), and the Innovator Growth-100 Accelerated ETF – Quarterly (XDQQ).
XDAP will seek to provide investors with double the upside performance of the SPDR S&P 500 ETF Trust (SPY), to a cap, with approximately single exposure to SPY on the downside, over a one-year outcome period.
XBAP will seek to provide investors with double the upside performance of SPY, to a cap, with approximately single exposure to SPY on the downside and a buffer against the first 9% of losses in SPY, over a one-year outcome period.
XDSQ will seek to provide investors with double the upside performance of SPY, to a cap, with approximately single exposure to SPY on the downside, over a three-month or quarterly period.
XDQQ will seek to provide investors with triple the upside performance of SPY, to a cap, with approximately single exposure to SPY on the downside, over a one-year outcome period.
The latest batch to come out includes the Innovator US Equity Accelerated ETF – October (XDOC), the Innovator US Equity Accelerated 9 Buffer ETF (XBOC), the Innovator US Equity Accelerated PLUS ETF (XTOC), and the Innovator Growth-100 Accelerated Plus ETF – October (QTOC).
XDOC will seek to provide investors with double the upside performance of SPY, to a cap, with approximately single exposure to SPY on the downside, over a one-year outcome period.
XBOC will seek to provide investors with double the upside performance of SPY, to a cap, with approximately single exposure to SPY on the downside and a buffer against the first 9% of losses in SPY, over a one-year outcome period.
XTOC will seek to provide investors with triple the upside performance of SPY, to a cap, with approximately single exposure to SPY on the downside, over a one-year outcome period.
QTOC will seek to provide investors with triple the upside performance of the Invesco QQQ Trust (QQQ), to a cap, with approximately single exposure to QQQ on the downside, over a one-year outcome period.
Looking at how these strategies perform in various market conditions, investors should expect Accelerated ETFs to hit performance cap finishes below the reference asset during strong up markets, or they can hit performance caps above the reference asset in normal up-market conditions. During down-market conditions, the strategy matches the performance of the reference asset.
According to the strategists, an accelerated upside can serve a variety of purposes in a portfolio. If you’re growing your portfolio via income, part of your growth will be taxable upon receipt of income. As a result, utilizing a strategy like the Accelerated ETFs, for growth, due to its expected tax efficiency, can create a situation where an investor can defer any gains until they choose to sell. Traditional long equity exposure often has a portion of its total return derived from taxable income. As uncertainty in the market grows, communicating a range of potential outcomes before investing can increase clients’ value.
Financial advisors who are interested in learning more about strategies to enhance equity exposure can watch the webcast here on demand.