On Friday, Innovator Capital Management, LLC (Innovator) announced the new upside caps and return profiles for the October series of the sponsor’s Defined Outcome ETFs™, as well as the firm’s four ETFs with quarterly outcome periods that also rebalanced at the end of the month. The resetting ETFs span Innovator’s Defined Outcome ETF™ lineup, including Buffer ETFs™, Accelerated ETFs™, Stacker ETFs™, and Defined Outcome Bond ETFs™.
“Recently, bond prices have fallen alongside equities, and the strongly negative correlation between U.S. equities and 10-year U.S. Treasuries has disappeared1. The change in this relationship that forms the bedrock of many investment portfolios is challenging advisors’ traditional portfolio construction and risk management techniques, especially for clients nearing or in retirement who have decreased risk tolerance for loss. With market risks growing as investors worry about the potential for inflation and weakening global growth, as well as the removal of monetary stimulus, the series of Innovator’s Defined Outcome ETFs™ resetting today can potentially help manage the risk of equity corrections, spiking yields, and lower future returns,” said Bruce Bond, CEO of Innovator ETFs.
Lineup Overview of Defined Outcome ETFs™ Resetting Today
Buffer ETFs™ seek to participate in the upside of a reference asset (such as the SPDR S&P 500 ETF (SPY) or Invesco QQQ Trust (QQQ)) to a cap while buffering a set level of loss over an outcome period of one quarter or one year. The ETFs simply reset at the end of their designated outcome period and can be held indefinitely.
Accelerated ETFs™ are the world’s first ETFs that seek to offer approximately two or three times the upside return of SPY or QQQ, to a cap, with approximately single exposure to the downside, over a quarterly or annual outcome period. The wealth accumulation-oriented Accelerated ETFs™ are the newest of Innovator’s strategy suites. Having launched April 1st, the quarterly resetting XDSQ and XDQQ completed their second full outcome period and reset at the end of September.
Stacker ETFs™ are the world’s first ETFs seeking to offer a “stacked” exposure to the upside of multiple equity markets with a single exposure to the downside over a set period of time. The October series of the Stacker ETFs™ completed their first annual outcome period at the end of the month.
Defined Outcome Bond ETFs™ seek to maximize the diversification benefits of bonds with a built-in floor or buffer against loss. TFJL aims to provide investors the upside performance of long-dated 20+ year U.S. Treasuries, to a cap, with a floor against loss greater than 5% over a quarterly outcome period via options on iShares 20+ Year Treasury ETF (TLT). This rebalance marked the first time TFJL reset since moving to a quarterly outcome period schedule rather than an annual outcome period, a change that was made to provide more frequent entry points to the strategy for advisors looking to the diversifying properties of this typical safe-haven asset, but also the potential to buffer clients’ bond portfolios from the impact of a swift rise in interest rates over three months.
The Innovator Defined Wealth Shield ETF (BALT) seeks to provide investors with a defensive investment strategy that offers upside exposure to U.S. large-cap equities, to a cap, with a buffer targeted against the first 20% of quarterly losses in SPY (SPDR S&P 500 Trust) over each three-month period. BALT was launched on July 1st and reset for the first time at the end of the quarter.
Return profiles for the Defined Outcome ETFs™ – October series with annual outcome periods, as of 10/01/21
| Ticker | Name | Reference Asset(s) |
Buffer Level | Cap* | Outcome Period | |
| NOCT | Innovator Growth-100 Power Buffer ETF™ – October |
QQQ | 15.00% | 10.65% | 12 months 10/01/21 – 9/30/22 |
|
| KOCT | Innovator U.S. Small Cap Power Buffer ETF™ – October |
IWM | 15.00% | 13.06% | 12 months 10/01/21 – 9/30/22 |
|
| BOCT | Innovator U.S. Equity Buffer ETF™ – October |
SPY | 9.00% | 13.69% | 12 months 10/01/21 – 9/30/22 |
|
| POCT | Innovator U.S. Equity Power Buffer ETF™ – October |
SPY | 15.00% | 16% | 12 months 10/01/21 – 9/30/22 |
|
| UOCT | Innovator U.S. Equity Ultra Buffer ETF™ – October |
SPY | 30.00% (-5% to -35%) |
6.49% | 12 months 10/01/21 – 9/30/22 |
|
| DSOC | Innovator Double Stacker ETF™ – October | SPY, QQQ | NA | SPY Upside Cap: 8.88% QQQ Upside Cap: 8.88% Total Upside Cap: 17.76% |
12 months 10/01/21 – 9/30/22 |
|
| DBOC | Innovator Double Stacker 9 Buffer ETF™ – October | SPY, QQQ | 9.00% | SPY Upside Cap: 5.42% QQQ Upside Cap: 5.42% Total Upside Cap: 10.84% |
12 months 10/01/21 – 9/30/22 |
|
| TSOC | Innovator Triple Stacker ETF™ – October | SPY, QQQ, IWM | NA | SPY Upside Cap: 5.53% QQQ Upside Cap: 5.53% IWM Upside Cap: 5.53% Total Upside Cap: 16.59% |
12 months 10/01/21 – 9/30/22 |
|
* The Caps above are shown gross of each fund’s .79% management fee. “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. 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.
Investors who purchase shares of the Stacker ETFs after the start of an outcome period may be exposed to enhanced risk.
Return profiles for the Defined Outcome ETFs™ – Quarterly resetting series, as of 10/01/21
| Ticker | Name | Reference Asset |
Buffer or Floor Level |
Cap*** | Outcome Period | |
| BALT | Innovator Defined Wealth Shield ETF | SPY | **20.00% Buffer | 1.00% | 3 months 10/01/21 – 12/31/21 |
|
| TFJL | Innovator 20+ Year Treasury Bond 5 Floor ETF™ | TLT | 5.00% Floor | 5.74% | 3 months 10/01/21 – 12/31/21 |
|
** Although BALT targets a 20% buffer, the buffer may fall into a range of 15% to 20%; there is no guarantee that the buffer will be within this range or that the Fund will provide the buffer.
*** The Caps above are shown gross of each fund’s management fee (.175% quarterly (0.69% annual) management fee for BALT; .79% for TFJL). “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” or “Floor” refers to the amount of downside protection the fund seeks to provide, before fees and expenses, over the full Outcome Period. Outcome Period is the intended length of time over which the defined outcomes are sought. Upon commencement of the Outcome Period, the remaining Cap and/or Buffer can be found on a daily basis via www.innovatoretfs.com.
| Ticker | Reference Asset |
Upside to Cap |
Downside | Cap**** | Outcome Period |
Rebalancing |
| XDSQ | SPY | 2X | 1X | 6.84% | Quarterly | 10/1/21 |
| XDQQ | QQQ | 2X | 1X | 8.52% | Quarterly | 10/1/21 |
**** The Caps above are shown gross of each fund’s management fee (.79% annual (.198% quarterly)). “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. “Downside” refers to the amount of downside exposure the fund seeks to provide, before fees and expenses, over the full Outcome Period. Outcome Period is the intended length of time over which the defined outcomes are sought. Upon commencement of the Outcome Period, the remaining Cap and/or Buffer can be found on a daily basis via www.innovatoretfs.com. Investors who purchase shares after the start of an outcome period may be exposed to enhanced risk.
Stacker ETFs™
At the end of TSOC, DSOC and DBOC’s outcome period, September 30, 2022, the ETFs will simply rebalance and reset, providing investors with new upside caps and a fresh 9% buffer, respectively, over the next one year outcome period. The Stacker ETFs™ do not expire and can be long-term core equity holdings in a portfolio. The options-based ETFs are anticipated to be as tax-efficient as traditional equity ETFs, with no planned cap gains distributions to shareholders and investors being able to defer taxes until selling.
Investors in the Innovator Stacker ETFs™ will not receive dividend yield from their holdings in TSOC, DSOC, or DBOC, respectively; the ETFs are based on the price returns of the reference ETFs (SPY, QQQ, and IWM) over the length of the outcome period. The Innovator Stacker ETFs™ will charge a 0.79% management fee.
The Stacker ETFs™ are constructed using Cboe FLEX Options, offering exposure to select equity markets rather than investing in them directly. The FLEX Options forming the underlying positions of the Innovator Stacker ETFs™ are based on SPY, QQQ, and IWM. The Innovator Stacker ETFs™ are likely to be issued on a quarterly frequency.
The Stacker ETFs™ provide defined returns over the entire outcome period, not on a daily basis. As a result, interim returns may lag the reference benchmark ETFs. This is due to the time-value nature of the underlying options held by the fund; as such, the Stacker ETFs™ won’t maintain proportional betas of 1.0 to the reference ETFs in instances of positive returns for the associated equity benchmarks. Though they provide simultaneous exposure to the upside of multiple benchmarks, the Stacker ETFs™ only seek to provide the positive performance of the reference ETFs over the full outcome period, up to a cap, and/or 1:1 downside to SPY over the outcome period. In the interim, or intra-outcome period, investors can expect the Stacker ETFs™ to exhibit lower beta than traditional passive index-tracking ETFs. An investor that purchases shares after an outcome period has begun may be exposed to the downside risks for QQQ and IWM.
Accelerated ETFs™
The Accelerated ETFs™ are not like leveraged ETFs, which typically seek to provide a magnified exposure on both the upside and the downside on a daily basis and can compound risk with higher volatility when held long-term due to their frequent, often daily, rebalancing. Instead, the Accelerated ETFs™ seek to provide asymmetrical returns over either a typically annual or quarterly outcome period that are magnified on the upside only, to a cap. Innovator’s Accelerated ETFs™ will rebalance annually or quarterly, making the funds more suited for asset allocation and longer-term investors rather than tools for ultra-tactical trading. In the Accelerated ETFs’™ case, it is important to note that investors must hold shares for an entire outcome period to achieve the enhanced returns that a fund seeks to provide.
While the funds are designed to participate in the reference ETF (SPY or QQQ) losses on a one-to-one basis over the duration of the outcome period as a whole, a decrease in the value of the reference asset’s share price may cause a decrease in the fund’s NAV while an outcome period is ongoing. Therefore, an investor that purchases shares after an outcome period has begun may be exposed to incremental downside risk if the reference asset has increased in value.
The shorter outcome period of the quarterly outcome period Accelerated ETFs™ (XDSQ, XDQQ) means that they will follow the reference asset (SPY or QQQ) more closely, but also that they have lower starting caps than Accelerated ETFs™ with an annual outcome period. Investors can use both outcome periods to tactically respond to changing market conditions should they wish to do so.
At the end of each Accelerated ETF’s™ outcome period, the ETF will simply rebalance and reset, providing investors with new upside caps, and a fresh 9% buffer in the case of XBOC, over the next outcome period. The Accelerated ETFs™ do not expire and can be long-term core equity holdings in a portfolio. The options-based ETFs are anticipated to be as tax-efficient as traditional equity ETFs, with no planned cap gains distributions to shareholders and investors being able to defer taxes until selling.
Investors in the Innovator Accelerated ETFs™ will not receive dividend yield from their holdings; the ETFs will be based on the price returns of the reference ETF (SPY or QQQ) over the length of the outcome period. The Innovator Accelerated ETFs™ will charge a 0.79% management fee.
The Accelerated ETFs™ are constructed using Cboe FLEX Options, offering exposure to equity markets rather than investing in them directly. The FLEX Options forming the underlying positions of the first three Innovator Accelerated ETFs™ are based on SPY or QQQ (the reference asset).
The Accelerated ETFs™ provide defined returns over the entire outcome period, not on a daily basis. As a result, interim returns may lag the reference benchmark ETFs. This is due to the time-value nature of the underlying options held by the fund; as such, the Accelerated ETFs™ won’t maintain proportional betas of 1.0 to the reference ETF in instances of positive returns for the associated equity benchmark. Though they provide simultaneous multiple exposures to the upside of the benchmark, the Accelerated ETFs™ only seek to provide the positive performance of the reference ETF over the full outcome period, up to a cap, and 1:1 downside to the reference asset over the outcome period. In the interim, or intra-outcome period, investors can expect the Accelerated ETFs™ to exhibit lower beta than traditional passive index-tracking ETFs. An investor that purchases shares after an outcome period has begun may be exposed to downside from that point forward if the reference asset has appreciated in value since the period began.
TFJL
Investors in the Innovator 20+ Yr Treasury Bond 5 Floor ETF™ will not receive yield from their holdings in TFJL; the ETF is based on the price returns of TLT over the length of the outcome period.
BALT
The Innovator Defined Wealth Shield ETF will target a buffer against the first 20% of losses in SPY over each quarterly outcome period. The buffer will be determined at the start of each quarterly outcome period. Depending on market dynamics ahead of an outcome period, the buffer for that applicable quarter will target 20% but will generally seek to be within a range of 15–20% against losses of SPY. If SPY (the reference asset) exceeds the buffer level that is determined at the beginning of the outcome period, investors holding shares since the outcome period began will absorb losses beyond the buffer level.
Innovator’s research shows that for the 761 3-month rolling periods between 1958 and May 2021, with a 20% buffer, investors would have been positive or neutral in 98.8% of those periods. In the periods exceeding 20%, the average loss was approximately 4%.
For more information, visit innovatoretfs.com.