Innovator’s Buffer Solution Sprouts

November 22, 2019

[This article appears in our December 2019 issue of ETFR.]

Bruce Bond and his business partner John Southard were the driving forces behind PowerShares, which they eventually sold to Invesco. They then teamed up again to acquire small issuer Innovator ETFs, and worked to launch the first defined outcome ETFs, which allow investors to participate in the market’s upside performance up to a cap, while protecting against losses in the fund.

Although Innovator’s initial launch, the Innovator IBD 50 ETF (FFTY), remains the firm’s largest ETF, at $318 million, the defined outcome family has expanded to include 25 funds with total assets of more than $1.5 billion. Here Bond discusses his return to ETFs and how he worked to bring to market the most exciting product the ETF industry has seen in years.



Will the expansion of commission-free ETF trading that we saw earlier this year be helpful to the Innovator ETFs?  
Yes. We’ve seen that it’s been significantly helpful already. A lot of advisors are on those platforms. They’re attracted to the fact that they don’t have to pay a commission at all when they buy or sell an ETF. We’ve had advisors calling, saying, “We’re definitely considering your products now that they’re available commission-free.”

It’s gone a long way to leveling the playing field for everyone. The small guys really couldn’t compete in that world like that. It gave the larger providers a significant advantage over the smaller issuers. Now, everybody can compete at the same level.

What were the barriers to launching these defined outcome ETFs? Did the SEC have any issues with them?
They did. It took us probably nine or 10 months to get the products approved. We thought it would be quicker than that. I would say, in general, that the SEC saw that the products had value for investors and that they provide risk mitigation opportunities for them that weren’t currently available.

To their credit, the SEC wanted to definitely make sure they were safe for everyone and worked with us to figure out the best ways to do that. To that end, we put together a web tool that people can look at and understand each day, for all the different products, if they bought it that moment or that day, what their outcome would be if they bought at that particular share value.

That brought the SEC more comfort.

The defined outcome ETFs have really been doing well with asset gathering. How much of this is the result of face-to-face conversations with advisors? Or is there something else driving the messaging?
We have a big marketing and sales effort to try to educate advisors as to the benefits for them and their clients—for advisors who want to grow their business and who are looking to differentiate themselves from other advisors, and have a very interesting and valuable tool available that others aren’t using.

This is one of the tools they would want to consider, to really build their business. So that’s one thing that resonates with some of the advisors. But at the same time, if you have a large advisor that has wealthy clients who are retired or near retirement, these people that have made their money don’t want to have to make it twice. They’re looking at ways to be able to continue to grow their assets and, at the same time, preserve or have a buffer against the market if it were to go down.

Advisors like it because they’re protecting their clients, and they’re not intentionally hurting the relationship with their clients by risking a loss in the market. It’s just a message generally that resonates among all investors and advisors, who want to protect assets but grow their books.

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