In a challenging fixed income market environment, investors can consider a new alternative ETF to better-navigate the tricky fixed income landscape.
In the recent webcast, Feeling Like It’s Time to Get Out of Bonds? Here’s Your Strategy, Bruce Bond, Co-Founder and CEO, Innovator ETFs; and Graham Day, Vice President of Product and Research, Innovator ETFs, warned that traditional risk managed solutions work until they don’t.
“We believe many investors today are looking to protect their wealth,” Bond said.
Equities are at all-time highs and after a strong bond run, returns are unlikely to be as strong in the future. Meanwhile, 78 million people are in the retirement risk zone, so many have a lower tolerance for any further risks.
Investors have continued to pour hundreds of billions of dollars into intermediate- and short-term bonds, despite record-low yields. However, these defensive safe havens are now exposed to greater duration or rate risk as interest rates are more likely to go up than down from here.
“We believe that mathematically bonds cannot repeat past performances,” Bond said.
“Bonds may limit the upside potential of a 60/40 portfolio in the future,” he added.
As an alternative to fixed income assets to help defend against further downturns, Innovator ETFs highlighted their suite of buffer or Defined Outcome ETF strategies. These buffer ETFs offer known built-in buffer solutions, upside exposure to the equity market, and defined outcomes.
“As expectations for a 60/40 appear muted, investors may benefit from incorporating Buffer ETFs as a way to maintain upside growth potential but with built-in buffers,” Day said.
For example, Innovator Capital Management recently launched the Innovator Defined Wealth Shield ETF (BALT). Listing on the Cboe, BALT will use options on SPY (SPDR S&P 500 ETF Trust) in seeking to provide exposure to the equity market to a cap while targeting a significant buffer against losses in SPY each calendar quarter.
BALT provides investment returns by allowing investors to participate in the upside of the equity markets with a significant buffer against losses, but it does not provide fixed income typical of bonds. The Innovator Defined Wealth Shield ETF seeks to offer advisors a defensive investment strategy intended as an alternative to cash, short-term debt, and core bond strategies common in traditional portfolio construction and conservative allocations.
The ETF targets a 20% buffer every 3-month outcome period. The ETF can be held indefinitely, resetting at the end of each outcome period. While the ETF targets a 20% buffer, it could range from 15% to 20%. BALT includes synthetic 1:1 exposure to the S&P 500 ETF (SPY), a put spread to provide buffer targeting 20%, and sell on the upside call to finance downside buffers.
Looking at historical data of rolling 3-month S&P 500 returns from 1958 to the present, 63% of 3-month rolling S&P 500 returns were positive, 36% of rolling 3-month S&P 500 returns fell between 0% and -20%, and only 1% of rolling 3-month S&P 500 returns were below -20%.
Financial advisors who are interested in learning more about the alternative strategy can watch the webcast here on demand.