Innovator: Enhancing Returns With Defined Outcome ETFs

The latest Defined Outcome strategy suite to come to market is the Accelerated ETFs.   

Reviewed by: Innovator ETFs
Edited by: Innovator ETFs

[This ETF Industry Perspective is sponsored by Innovator.]

Defined Outcome ETFs seek to provide investors with a liquid, cost-effective way of redefining their investment outcomes. Innovator Accelerated ETFs are the newest iteration and are designed to offer 2x or 3x the upside return of SPY or QQQ, to a cap, with approximately single exposure on the downside, over a 3-month or 1-year outcome period.

Since its inception in August 2018, the Defined Outcome segment of the ETF market has been growing rapidly, now totaling more than 100 ETFs, exceeding $7 billion in AUM. Defined Outcome ETFs are designed to reshape the return potential of a reference asset, such as the S&P 500. The first series of Defined Outcome ETFs offered upside exposure, to a cap, with built-in buffers on the downside.

The latest Defined Outcome strategy suite to come to market is the Accelerated ETFs.

Innovator Accelerated ETFs are designed to boost upside returns to a cap, without taking on additional downside risk. We are the first to introduce this strategy to the ETF marketplace.

Through the use of options, these strategies are designed to offer:

  1. 2x or 3x the upside return of SPY (SPDR S&P 500 ETF Trust) or QQQ (Invesco QQQ Trust), to a cap, with
  2. Approximately single exposure on the downside
  3. Over a three-month or 1-year outcome period.

After launching the first series of our Accelerated ETFs on April 1 earlier this year, we anticipate launching our second series on July 1, providing investors another opportunity to invest with fresh caps. This date also marks the first cap reset for our two quarterly Accelerated ETFs ̶ the first of their kind.

Potential For Outperformance
The potential to outperform is not based on stock picking, rather it is built right into the structure. A simple way to think about the Accelerated ETFs’ potential for outperformance is this: If the reference asset, e.g. SPY or QQQ, generates a positive price return that is less than the cap of the ETF, the ETF will outperform.


Accelerated ETF Excess Return

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Here are the starting caps for the April series of our Accelerated ETFs:



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Caps are, of course, a function of market volatility, dividends, and interest rates and can fluctuate from one day to the next, which means they may be higher or lower when they reset or when new funds launch.

Why Now?
We believe a perfect storm of factors may be threatening to combine in a way that could push equity returns to revert to their longer-term norm of single-digit gains: historically high stock market valuations, inflationary pressures that erode asset values, and higher interest rates.

Let’s look at each of these factors that signal lower returns in stocks.

1. Overbought Equity Markets
High stock valuations have historically been associated with lower future returns. With the exception of the period surrounding the tech bubble, the Shiller P/E ratio has never been higher than it has been during the Spring of 2021:


Shiller P/E Ratio

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Past returns are, of course, no guarantee of future performance, but history nevertheless shows that higher starting valuations have tended to result in lower 10-year returns:



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2. Rising inflation
The inflation numbers released in May 2021 indicated that the Consumer Price Index had increased by 4.2% over the previous 12 months, the largest increase since September 2008. Whether or not this proves to be merely transitory, as the Fed has indicated, or the sign of a longer-term trend, it is in no small part related to the money supply.

The Fed’s policy response to Covid-19 has resulted in a massive increase in the money supply (M2). As economist and Nobel laureate Milton Friedman noted, “Inflation is always and everywhere a monetary phenomenon. … It is the result of too much money chasing too few goods.”

Consider the following data points:

Pre-COVID 12-Month M2 Growth Rates 1960-2020:

  • Average: 6.8%
  • Max: 13.8%
  • April 30, 2020 – April 30, 2021 Average: 23.1%

Source: Bloomberg, as of April 30, 2021


Rolling 12-month M2 Money Supply Growt

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3. Higher Interest Rates
Higher inflation generally results in higher interest rates, as lenders demand a larger yield premium to make up for the expected dilution of the dollar’s purchasing power. According to a survey by the National Association for Business Economics, 46% believe the Fed will lift the Fed Funds rate in 2022, compared to central bank officials who do not see an increase until late 2023.

Where Do They Fit?
Core equity
The relatively infrequent reset of the underlying options at expiration make the Accelerated ETFs a viable long-term, buy-and-hold investment, compared to the leveraged ETFs that are often used as short-term trading vehicles.

Traditional leveraged exposures are leveraged on both the upside and downside: If the investor gets 2x the return on an investment, it applies to gains and declines on a daily basis. But this daily rebalancing distorts returns over longer periods of time. For example, from March to May 2020, the S&P 500 generated a positive return, but the daily 2x return was negative.

Accelerated ETFs are not rebalanced daily, but rather only at the end of their outcome periods, so they are not exposed to the counterintuitive, longer-term effects of daily leverage resets. As such, they can act as a core equity asset.

Here’s how it could work in a client’s portfolio: Take a portion of assets with naked exposure to the S&P 500 and invest it in Accelerated ETFs for enhanced upside with risk management features ̶ especially handy at a time of market transition and volatility.


Where do Accelerated ETFs

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The table below illustrates the returns the ETFs seek to provide over an outcome period:


Why Accelerated ETFs

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Tax Efficiency
Accelerated ETFs are tax efficient1 in that they automatically roll into the next outcome period so there is no capital gain to trigger a taxable event. Other structures that offer exposure to defined outcome investment strategies often incur a capital gain at the end of the outcome period. That is not the case for investors of Accelerated ETFs who can hold the asset indefinitely and control the timing of when they want to incur these taxes.

1 The ETFs are as tax efficient as traditional ETFs due to a recent rule change allowing the in-kind trading of options.

Takeaway: Given current equity market valuations and the potential for an extended period of below-average returns, we believe the Accelerated ETFs represent a compelling core equity solution for the years ahead.

If the Outcome Period has begun and the Fund has experienced an accelerated return, an investor purchasing Shares at that price may be subject to losses that exceed any losses of the Underlying ETF for the remainder of the Outcome Period and may have diminished or no ability to experience further accelerated return, therefore exposing the investor to greater downside risks.

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.

Investing involves risks. Loss of principal is possible. 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 detail list of fund risks see the prospectus.

Technology Sector Risk. Companies in the technology sector are often smaller and can be characterized by relatively higher volatility in price performance when compared to other economic sectors. They can face intense competition which may have an adverse effect on profit margins.

FLEX Options Risk. The Fund will utilize FLEX Options issued and guaranteed for settlement by the Options Clearing Corporation (OCC). In the unlikely event that the OCC becomes insolvent or is otherwise unable to meet its settlement obligations, the Fund could suffer significant losses. Additionally, FLEX Options may be less liquid than standard options. In a less liquid market for the FLEX Options, the Fund may have difficulty closing out certain FLEX Options positions at desired times and prices. The values of FLEX Options do not increase or decrease at the same rate as the reference asset and may vary due to factors other than the price of reference asset.

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 ETFs are not expected to move directly in line with the Reference Asset during the interim period.

Investors purchasing shares after an outcome period has begun may experience very different results than funds' investment objective. Initial outcome periods are approximately one year or one quarter, beginning on the funds' inception date. Following the initial outcome period, each subsequent outcome period will begin on the first day of the month the fund was incepted. After the conclusion of an outcome period, another will begin.

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 to the Cap, an investor purchasing 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 the Fund. The Funds' website,, provides important Fund information as well information relating to the potential outcomes of an investment in a Fund on a daily basis.

The Funds' investment objectives, risks, charges and expenses should be considered carefully before investing. The prospectus contains this and other important information, and it may be obtained at Read it carefully before investing.

Innovator ETFs are distributed by Foreside Fund Services, LLC.