John Southard, Co-Founder and CIO, Innovator Capital Management, and Graham Day, CFA, Vice President of Product & Research, Innovator Capital Management, discuss Innovator Capital’s Defined Outcome ETFs as a solution to risk management in anticipation for the next market downturn.
As the economy emerges from the tumultuous landscape of 2020, many investors today are looking to protect their wealth. “The need for downside protection is as great as it’s ever been, especially for retirees and future retirees,” says Southard.
Innovator Defined Outcome ETFs offer the reliable risk management, capital preservation, and dependability that these investors seek.
“Modern portfolio theory suggests the best way to protect wealth is to combine non-correlated asset classes, but the challenge with that is that these asset classes can also become highly correlated during market corrections,” says Southard.
Historically, bonds have provided a cushion to equities as an uncorrelated asset class as markets have corrected. In our current economic climate, though, current interest rates continue to be at all time lows and duration rates at all time highs, which results in the extreme sensitivity of bonds to interest rates and duration risk. Moreover, even if rates don’t increase, investors are still only earning 1.5-2% on the bonds in their portfolio. This poses a significant challenge for advisors today. Many defensive strategies rely on past performance, without any assurance of mitigating unforeseen future downside.
To prevent clients from staying out of the market completely as a response to anticipated risk, and thereby missing out on valuable gains, implementing a strategy with a built-in defense to downside is key. Innovator Defined Outcome ETFs offers this strategy. The Defined Outcome – Buffer ETFs offer a buffer against losses and upside performances to a cap, over a specific time period.
“We did not create Defined Outcome Investing, but we were the first to put it in the ETF wrapper, which brings significant benefits to the end advisor and their end clients, including things like tax efficiency, where taxes are now dictated at the shareholder level as opposed to the structural level,” says Day.
There are three variations of the Innovator Buffer ETF, each traded on the S&P 500, with a starting buffer ranging from 9%-3%, and average upside cap ranging from 7%-16.21%. Each ETF can be purchased at the beginning of the month, and the investor will receive a fresh upside and fresh built-in buffer.
The Innovator Buffer ETFs utilize the S&P 500 dividends to purchase downside buffers, and because the cost of those buffers is likely more than the income that received from the dividend, the upside call (which is the cap) is sold at the highest level possible. With the built-in buffer, these ETFs provide a level of certainty when dealing with downside risk management.
“Over the calendar year, the January series offered significantly lower max drawdowns and significantly less realized volatility. You did not capture all of the upside, but you experienced far less volatility, and the ETFs did what they were supposed to do. They met their performance caps and took the risk of having unknown outcomes off the table,” says Day.
The Innovator Defined Wealth Shield ETF (BALT) is a defensive, equity-based bond alternative. It provides upside exposure to the S&P 500 ETF Options + Disciplined up to a cap, with a 15-20% target quarterly buffer range. This ETF mitigates interest rate risk and credit risk, while requiring no active management. Every three months, the product rebalances into a new outcome period.
Innovator Capital LLC launched the world’s first Defined Outcome ETFs in 2018, and since then has become the 4th largest ETF provider in the world and has 5.1 billion in ETF AUM. Innovator recently partnered with Milliman FRM, a global actuarial firm with AUA over $140 billion to bring Defined Outcome ETFs to market.
To learn more, register & watch a replay of Innovators webcast: Solutions to Market Challenges Facing Clients and Advisors.
Record amounts of wealth has been created since the beginning of COVID. For many clients, now may be the time to begin preserving this capital. Join us as we discuss how traditional risk-managed solutions are unreliable and how to address looming risks facing advisors and their clients today.