New Angle On Defined Outcome ETFs

Today, Innovator added four ETFs to its family of “Accelerated” defined outcome ETFs and launched a new take on the defined outcome concept that provides risk-averse investors with an alternative to bonds or cash.

The Innovator Defined Wealth Shield ETF (BALT) is different from most existing defined outcome ETFs in that it is designed as a replacement for bond exposure—in particular, short-term bond exposure. It resets quarterly (the first reset will be Sept. 30), offers a pre-expenses upside cap of 0.70%, and is designed to protect against the first 20% of downside performance. The cap varies from quarter to quarter and is largely determined by volatility levels and interest rates. 

BALT’s overall performance within those parameters represents the price return of the SPDR S&P 500 ETF Trust (SPY), and the prospectus specifically notes that the fund is not a solution designed for investors seeking income.

The fund charges an annual expense ratio of 0.69% and lists on Cboe Global Markets.

Highly Defensive Product

“BALT is unique in that it was created specifically to be an alternative to bonds. It has a significantly higher target buffer level—we target 20% every quarter as opposed to [something like] our Ultra series buffering between -5% and -35% over an annual outcome period,” said Graham Day, Innovator’s vice president of product and research.

“It is created solely to go after bonds and to give advisors who no longer like the risk/reward of bonds something that maintains a highly defensive stance and allows them to eliminate interest rate and credit risk,” he added, noting that many advisors do not feel they are being paid to take those risks in the current environment.

Day further points out that between low interest rates and management expenses, the move into shorter-duration fixed income products has even resulted in losses for some investors.

BALT offers what Day describes as “a highly defensive stance” for investors, and notes it is very rare—with a less than 10% occurrence—for the market to not provide at least the targeted cap in any given outcome period.

“We think BALT can help investors diversify their defensive allocations by working to reduce interest rate risk while maintaining a defensive, risk-managed posture toward equities,” said Innovator CEO Bruce Bond in a press release.

Like the other existing defined outcome ETFs, BALT is actively managed and relies on flexible exchange (FLEX) options on its reference ETF to execute its strategies. The prospectus also notes that although the fund targets protecting against up to 20% of downside losses, that downside protection could actually range from 15% to 20%.

The Accelerated ETFs

Meanwhile, the new “Accelerated” ETFs are the newest update to a family that Innovator launched in April. The funds offer leveraged upside of 2x or 3x as well as 1x exposure to downside performance and reflect the price return of SPY or the Invesco QQQ Trust (QQQ). The new additions include the following:

• The Innovator U.S. Equity Accelerated ETF – July (XDJL) aims to provide 2X upside exposure up to a cap of 16% before expenses, and single exposure to the downside performance of SPY.
• The Innovator U.S. Equity Accelerated 9 Buffer ETF – July (XBJL) aims to offer similar exposure to XDJL, with an upside cap of 9.20%, but it also buffers against the first 9% of downside performance, before expenses.
• The Innovator U.S. Equity Accelerated Plus ETF – July (XTJL) aims to offer triple exposure to the performance of SPY, up to a pre-expenses cap of 17.06%, and single exposure to downside performance.
• The Innovator Growth Accelerated Plus ETF – July (QTJL) aims to provide triple exposure to the upside performance of QQQ, up to a pre-expenses cap of 19.35%, but single exposure to downside performance.

Each fund relies on actively managed strategies involving FLEX options to achieve its performance.

All of the new Accelerated funds reset annually and, like BALT, list on Cboe Global Markets. Each comes with an expense ratio of 0.79%. 

Contact Heather Bell at [email protected]