Is This the New ETF Revolution? Innovator to Launch S&P 500 Defined Outcome ETFs

Defined Outcome ETFs seek to buffer against losses of up to 10%, 15%, and 30%

By nature, equity investments typically seek to achieve speculative returns, with uncertain levels of risk, over an unknown period of time. But what about an equity strategy that allows an investor to obtain defined exposures to the S&P 500, where the upside potential, downside protection level and outcome period are all known prior to investing? That revolutionary concept is exactly what Innovator Capital Management is seeking to effectuate through its suite of Innovator Defined Outcome ETFs: Innovator S&P 500 Buffer ETF (CBOE: BJUL), Innovator S&P 500 Power Buffer ETF (CBOE: PJUL) and Innovator S&P 500 Ultra Buffer ETF (CBOE: UJUL).

BJUL, PJUL and UJUL, which will begin trading on Aug. 8, incorporate a unique strategy that melds certain features of structured note and insurance products to provide downside protection levels of 10%, 15% and 30% (from -5 to -35%) as well as upside growth potential (to a cap), over a defined outcome period of approximately one-year, at which point each ETF will roll into a new set of positions and start a new outcome period.. The heart of this strategy pulsates within an ETF body in order to provide investors with an added layer of transparency, liquidity and lower costs inherent in the ETF space.

All three ETFs provide investors with broad-based exposure to the price return of the S&P 500, but rather than go through the traditional route of S&P 500 ETFs that track the index through individual equities, the Innovator ETFs construct their portfolio using customized exchange-traded Cboe S&P 500 FLEX® Options that carry various strike prices and the same expiration date.

Three Loss Buffering Options

By effectively buffering downsides to a specific percentage, Innovator is able to offer its defined outcome ETFs in three flavors–all three track the return of the S&P 500 up to a predetermined cap with varying degrees of loss buffering:

  • Innovator S&P 500 Buffer ETF (CBOE: BJUL): BJUL buffers investors against the first 10% of losses over the outcome period, before fees and expenses.
  • Innovator S&P 500 Power Buffer ETF (CBOE: PJUL): PJUL buffers investors against the first 15% of losses over the outcome period, before fees and expenses.
  • Innovator S&P 500 Ultra Buffer ETF (CBOE: UJUL): UJUL buffers investors against a decline of 30% of losses over the outcome period, from -5% to -35%, before fees and expenses.

In order to realize the return profile associated with each ETF, an investor must hold each ETF for the duration of the outcome period (approximately one year), but the products can be held indefinitely if the investor so chooses. Furthermore, the cap levels associated with the Defined Outcome ETFs will reset on an annual basis.

This type of approach to investing is not entirely new. Outcome based investing has been available for decades, largely through bank or insurance channels (e.g., structured notes and structured annuities). Innovator Defined Outcome ETFs were built to replicate features of the largest structured product category, which are tied to the return of an underlying equity asset, like the price return of the S&P 500 Index. The structured product market has historically been accessed by institutional and high net worth investors, and is largely ignored by the investing public. With Innovator Defined Outcome ETFs’ active management and expense ratio of 0.79%, the suite of Innovator ETFs provide investors with a sophisticated product, at a lower cost, and with potentially greater transparency and liquidity than many equity-linked structured products.

Formed in 2014, Innovator Capital Management is currently led by ETF visionaries Bruce Bond and John Southard, founders of one of the largest ETF providers in the world. Innovator Capital Management partnered with several of the world‘s leading financial institutions (e.g., Cboe, S&P Global, and Milliman Financial Risk Management) to harness advancements in financial technology to build the Innovator Defined Outcome ETFs.

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