Andrew Nelson, CFA, Director of Product Strategy for Innovator ETFs, joined Keith Black, Managing Director of RIA Channel, to discuss the growth and uses of the buffer ETF strategy.
The Buffer ETF industry has seen tremendous growth, with assets now exceeding $60 billion in over 400 products. Nelson explains that the factors driving the growth of these funds include that the baby boom generation, who hold half of the assets in the US, are looking to protect rather than accumulate assets as they enter retirement. Advisors are becoming more familiar with the strategy as more products have entered the market.
A Buffer ETF provides exposure to the equity market with downside losses limited by the buffer. For example, a S&P 500 buffer with 15% protection is designed to earn a zero return over one year if the Index declined by 15%, before fees and expenses. The cost of that protection is a cap on the returns that can be earned.
Once advisors understand how Defined Outcome and Buffer ETFs work, their thoughts turn to how they can be used in portfolios. Investors disappointed by recent bond market performance may choose to reallocate from their fixed-income sleeves to options-based ETFs. Others may choose to build a new equity hedged allocation. Rather than holding a portfolio with 60% in equity sleeves and 40% in bond sleeves, we have seen certain investors add 10% to 20% to Buffer ETFs, reaching allocations of 60/30/10 or 60/20/20.
Dual-Directional Buffer ETFs offer the potential to earn positive returns in declining equity markets. A 15% inverse Dual Directional ETF seeks to provide a positive return when markets decline within a specific range. For example, positive 10% return when the reference asset declines by 10% over a one-year outcome period. Again, the potential positive returns in down markets are paid for by capping the return of the fund during strong equity markets, with the most recent Dual Directional ETF limited to a 10% upside cap over a one-year where large cap equities rise. Historically, the S&P 500 Index has earned returns above -15% in 95% of all one-year rolling periods1.
Dual Directional Buffer ETFs have been compared to other products that use options-based strategies, such as covered calls and structured products. Covered call strategies focus on generating income, while Dual Directional Buffer ETFs do not intend to distribute income. Payoffs similar to Dual Directional Buffer ETFs are offered in structured products, but notes can be customized to offer a wide range of risk-return trade-offs. Dual Directional Buffer ETFs offer greater flexibility than the long-term commitment required for structured products offering comparable payoff profiles.
WEBCAST – The New Monthly Income Engine Advisors Are Talking About: Autocallable ETFs (ACEI & ACII)
Autocallables have quickly become one of the fastest-growing structured income tools—and Innovator is bringing them to advisors in a liquid, single-ticker ETF wrapper. ACEI and ACII seek high monthly income through a laddered portfolio of autocallable instruments tied to either broad U.S. equity indexes (ACII) or a large-cap equity basket (ACEI), with coupon payments.
Join us for a timely webinar on:
- How autocallable ETFs generate monthly distributions and what advisors should expect
- Key differences between ACII (index-linked) and ACEI (equity-linked), and where each may fit in client portfolios
- Unpacking ACEI & ACII’s first distribution yield
- Practical portfolio uses for equity-linked income
- Q&A with experts from Citi & Innovator ETFs
Accepted for 1 CFP® / IWI / CFA CE Credit
Resources:
Structured products are typically designed to offer an investor the potential to receive returns based upon the performance of a reference asset, index, single equity security, or basket of securities. The return will vary with principal and gains, if any, paid at maturity, subject to the credit risk of the issuer. Maturity is typically fixed. Credit risk refers to the possibility that the issuer will not be able to make payments.
Active ETFs are subject to management risk, which means the adviser to the ETFs applies investment techniques and risk analyses in making investment decisions, but there can be no guarantee that an ETF will meet its investment objective. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and the general securities market.
While shares of ETFs can be purchased and sold on exchange through a brokerage account, shares are not individually redeemable from an issuer. Authorized Participants may redeem shares directly from an issuer through large creation/redemption units.
The Funds have characteristics unlike many other traditional investment products and may not be suitable for all investors. For more information regarding whether an investment in the Fund is right for you, please see “Investor Suitability” in the prospectus.
The Outcomes that the Funds seek to provide may only be realized if you are holding shares on the first day of the Outcome Period and continue to hold them on the last day of the Outcome Period. There is no guarantee that the Outcomes for an Outcome Period will be realized or that the Funds will achieve their investment objective.
The Funds face numerous market trading risks, including active markets risk, authorized participation concentration risk, buffered loss risk, cap change risk, capped upside return risk, correlation risk, liquidity risk, management risk, market maker risk, market risk, non-diversification risk, operation risk, options risk, trading issues risk, upside participation risk and valuation risk. For a detailed list of Fund risks see the prospectus.
Buffer ETFs™ Risk. Fund shareholders are subject to an upside return cap (the “Cap”) that represents the maximum percentage return an investor can achieve from an investment in a Fund for the Outcome Period, before fees and expenses. If the Outcome Period has begun and a Fund has increased in value to a level near to the Cap, an investor purchasing shares at that price has little or no ability to achieve gains but remains vulnerable to downside risks. Additionally, the Cap may rise or fall from one Outcome Period to the next. The Cap, and the Fund’s position relative to it, should be considered before investing in a Fund. The Funds’ website, www.innovatoretfs.com, provides important Fund information as well information relating to the potential outcomes of an investment in a Fund on a daily basis.
The Funds only seek to provide shareholders that hold shares for the entire Outcome Period with their respective buffer level against Reference Asset losses during the Outcome Period. You will bear all Reference Asset losses exceeding the Buffer. Depending upon market conditions at the time of purchase, a shareholder that purchases shares after the Outcome Period has begun may also lose their entire investment. For instance, if the Outcome Period has begun and the Fund has decreased in value beyond the pre-determined Buffer, an investor purchasing shares at that price may not benefit from the Buffer. Similarly, if the Outcome Period has begun and the Fund has increased in value, an investor purchasing shares at that price may not benefit from the Buffer until the Fund’s value has decreased to its value at the commencement of the Outcome Period.
Dual Directional Buffer ETFs™ Risk. Fund shareholders are subject to an upside return cap (the “Cap”) that represents the maximum percentage return an investor can achieve from an investment in the Funds for the Outcome Period, before fees and expenses. If the Outcome Period has begun and the Fund has increased in value to a level near the Cap, an investor purchasing shares at that price has little or no ability to achieve gains but remains vulnerable to downside risks. The Cap may rise or fall from one Outcome Period to the next. The Cap, and the Fund’s position relative to it, should be considered before investing in the Fund. The Funds’ website, www.innovatoretfs.com, provides important Fund information as well information relating to the potential outcomes of an investment in a Fund on a daily basis.
The Funds seek to provide positive returns equal to the absolute value of the reference asset’s price decreases (Inverse Performance) if the reference asset experiences negative returns that are less than or equal to the Inverse Performance Threshold. If the reference asset decreases in value beyond the Inverse Performance Threshold over the course of the Outcome Period, the Funds will not provide any positive returns. Accordingly, each Fund’s value could drop significantly as a result of their Inverse Performance Threshold being exceeded at the end of the Outcome Period whereby any gains experienced by the Fund will be lost, and the buffer will be provided to shareholders. Furthermore, if the Outcome Period has begun and the reference asset has decreased in value below its initial value at the start of the Outcome Period, an investor purchasing Shares at this point may not experience Inverse Performance to the extent of the Inverse Performance Threshold and will remain vulnerable to downside risks.
If an investor is considering purchasing Shares during the Outcome Period, and the Fund has already decreased in value by an amount that exceeds the Inverse Performance Threshold, an investor purchasing Shares at that price will have increased gains available prior to reaching the Upside Cap but may not benefit from the buffer that the Funds seek to provide for the remainder of the Outcome Period as any subsequent losses will be experienced on a one-to-one basis. Conversely, if an investor is considering purchasing Shares during the Outcome Period and the Funds have already increased in value, then a shareholder may experience losses that exceed the buffer, which is not guaranteed.
These Funds are designed to provide point-to-point exposure to the price return of the Reference Asset via a basket of Flex Options. As a result, the Funds are not expected to move directly in line with the Reference Asset during the interim period.
The Fund will not terminate after the conclusion of the Outcome Period. After the conclusion of the Outcome Period, another will begin. There is no guarantee that the Outcomes for an Outcome Period will be realized.
Investing involves risk. Principal loss is possible. Innovator ETFs are distributed by Foreside Fund Services, LLC (Foreside). Innovator and Foreside are not affiliated with RIA Channel.
The Funds’ investment objectives, risks, charges and expenses should be considered carefully before investing. The prospectus and summary prospectus contain this and other important information, and it may be obtained at innovatoretfs.com. Read it carefully before investing.