With prices, issuance and duration near record highs, Innovator’s Defined Outcome Bond ETFs™ seek to provide exposure to bonds with known buffer levels against losses. Innovator Capital Management, LLC (Innovator) today announced the launch of the first Defined Outcome Bond ETFs™, establishing 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 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.

Today, the Innovator 20+ Year Treasury Bond 5 Floor ETF – July (TFJL) and the Innovator 20+ Year Treasury Bond 9 Buffer ETF – July  (TBJL) list on the Cboe. TFJL seeks 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% over the outcome period. TBJL seeks to provide exposure to the upside performance of TLT to a cap and a buffer against the first 9% of price losses over the outcome period.

“We’re very excited to chart another completely new category in the ETF world by bringing the benefits of Defined Outcome ETF™ investing to the bond market. Today, advisors are faced with some of the highest risk bond markets in history, which is driving many to rethink conventional wisdom when it comes to the core of their debt allocations. With the listing of these new Defined Outcome Bond ETFs, advisors will finally have access to some of the same sophisticated tools available to institutional investors but in the liquid and tax-efficient ETF structure,” said Bruce Bond, CEO of Innovator ETFs.

He continues, “We think Innovator’s Defined Outcome Bond ETFs will provide significant potential improvements to bond allocations by removing some of the exposure to interest rate tail risk, which has grown extreme and keeps advisors up at night. 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,”

Return profiles for the Innovator Defined Outcome Bond ETFs – July Series, as of 8/18/20
TickerNameBuffer LevelCap*Outcome Period
TFJLInnovator 20+ Year Treasury Bond 5 Floor ETF™5.00% Floor6.75%8/18/20 – 6/30/21
TBJLInnovator 20+ Year Treasury Bond 9 Buffer ETF™9.00% Buffer9.25%8/18/20 – 6/30/21

* The Caps above are shown gross of their respective management fee (.79%). “Cap” refers to the maximum potential return, before fees and expenses and any shareholder transaction fees and any extraordinary expenses, if held over the full Outcome Period. “Buffer” refers to the amount of downside protection the fund seeks to provide, before fees and expenses, over the full Outcome Period. The Floor is only operative against Underlying ETF share price losses exceeding 5% over the duration of the Outcome Period. There is no guarantee that the Fund will be successful in its attempt to provide the Floor. If an investor is considering purchasing Shares during the Outcome Period, and the Fund has already increased in value, then a shareholder may experience losses prior to gaining the protection offered by the Floor, which is not guaranteed. Outcome Period is the intended length of time over which the defined outcomes are sought. The Caps can be found on a daily basis via www.innovatoretfs.com.

At the end of TFJL and TBJL’s outcome period, June 30, 2021, the ETFs will simply rebalance and reset, providing investors with a fresh 5% Floor or 9% Buffer, respectively, and new upside caps over the next one year outcome period. The ETFs do not expire and can be long-term core bond holdings in a portfolio. The options-based ETFs are anticipated to be as tax-efficient as traditional bond ETFs, with no planned cap gains distributions to shareholders and investors being able to defer taxes until selling.

John Southard, CIO of Innovator ETFs, said, “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 U.S. 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 U.S. 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 materialize substantially over the mid-term,” Southard continued.

“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%, and they would fall -17% if rates were to rise to where they were two years ago. Long-term U.S. treasury prices would fall more than -20% if rates went back to January 1st and -34% if rates were to rise to where they were two years ago. 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 most severe economic contraction in our lifetimes, which makes the uncorrelated nature of long-dated U.S. 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 maximizing the potential diversification benefits of the asset class. These are tools that can help investors stay invested,” concluded Southard.

Innovator Defined Outcome ETFs – Benefits to Advisors

  • Pioneer and creator of Defined Outcome ETFs™ with 51 ETFs4 and nearly $3.2 billion in AUM across family5
  • Tax-efficient exposure to five broad benchmark equity indexes (S&P 500, NASDAQ 100, Russell 2000, MSCI EAFE, MSCI EM), and now 20+ Year U.S. Treasuries
  • Monthly issuance on the S&P 500 with three buffer levels (9,15, or 30%)
  • Only sponsor with a track record of completed Outcome Periods

 

For more market trends, visit ETF Trends.