Innovator: Why Earn Your Money Twice?

Innovator: Why Earn Your Money Twice?

Own the market with a built-in buffer. Innovator ETFs’ Bruce Bond discusses the massive inflows into the firm’s defined outcome products.

Reviewed by: Innovator ETFs
Edited by: Innovator ETFs

 [This ETF Industry Perspective is sponsored by Innovator ETFs.]


In 2018, Innovator ETFs launched a revolutionary set of products called “Defined Outcome ETFs.” These ETFs offer investors the upside of the market (to a cap), with a built-in buffer, over an outcome period of one year. Today the Innovator Defined Outcome ETF complex has expanded to more than 40 ETFs with three buffer levels (9%, 15% and 30%) that track multiple broad market indexes. Here, Bruce Bond explains why these ETFs do so well during times of market turmoil and uncertainty. What makes the Buffer ETFs a particularly good investment in times like these?
Bruce Bond: First, to provide some context, Innovator Defined Outcome ETFs are a revolutionary ETF line that provides investors with the upside of the market (to a cap), and a built-in downside buffer, over an outcome period of one year. We have approximately 40 ETFs in the marketplace, offering exposure to one of three buffer levels (9%, 15% or 30%) across five major market indexes (S&P 500, NASDAQ 100, Russell 2000, MSCI EAFE and MSCI Emerging Markets).

One of the benefits of Defined Outcome ETFs is that market volatility typically contributes positively to upside caps, providing investors greater upside participation over the next one-year outcome period. This is exactly what we witnessed over the past week. The March series of our S&P 500 Buffer ETFs (BMAR, PMAR and UMAR) all came to market with higher than average upside caps.

This unique feature (greater upside potential during volatile times) is in stark contrast to most risk management strategies, which typically reduce market exposure as volatility increases. Defined Outcome ETFs allow investors to stay invested in the market, regardless of which direction the market is going.

We saw this play out during the last week in February. Over fears of the coronavirus, droves of investors fled the market; and many even had trouble accessing online accounts to cash out due to the demand to do so. But what if those investors remained invested all along, but with a built-in buffer? Would they have rushed for the exits so quickly? Likely not. Is there any single ETF in the family of roughly 40 ETFs that’s outperformed all the other ones in this environment?
Bond: Each ETF has a specific buffer attached to it. So in terms of downside mitigation, generally the greater the buffer, the more the ETF is going to resist a downside movement.

So I wouldn’t necessarily encourage folks to simply buy the ETF that has “outperformed the rest.” What a lot of advisors are doing is using the Pricing Tool and Product Table at to find the payoff profile that best aligns with their goals.

For example, one may have more upside remaining over the outcome period, and another might offer a greater downside buffer than another. It really has added much greater certainty and flexibility to the financial planning process.

That said, if you held my feet to the fire, I will say that the two approaches that have gathered the most assets historically are the Buffer ETFs (9% initial buffer) and the Power Buffer ETFs (15% initial buffer). Given the recent market uncertainty, has anything struck you about the funds’ performance or what investors are doing with them?
Bond: Our March Series of the Defined Outcome ETFs launched on March 2, 2020, right in the midst of the sell-off, and investors benefitted from that in terms of the cap they were able to obtain.

The starting caps for the Innovator S&P 500 Buffer ETF (BMAR), Power Buffer ETF (PMAR), and Ultra Buffer ETF (UMAR) were 16.14%, 11.01% and 7.96%, respectively—quite a bit higher than some of the other defined outcome offerings that launched during less turbulent times. For investors who jumped in, they benefit from a higher than average level of upside participation, with a built-in buffer of 9%, 15% or 30%, over the outcome period.

What has struck me as innovative (pardon the pun) is that we have witnessed many investors (who rode the market down) are now moving into defined outcome ETFs in an effort to recapture some of those lost gains.

These folks understand that they may be able to recover a portion of their losses should the market remain down, or if it rebounds over the remainder of the outcome period. It just shows me that this may be a great way to hop into the market and not have as much risk on your side, because you have a buffer against losses over an outcome period. With the three funds coming out at the start of March, that seems fortuitous.
Bond: The timing of the March Series was very beneficial, and folks are recognizing the upside potential that is available to them. A sizable portion of the $500 million raised over the past couple months has come in response to this recent wave of volatility. We saw this in January 2019 as well, which really started to put the products on the radars of financial advisors. How do the Buffer ETFs help investors?
Bond: The short answer is they provide more certainty to the investment experience. People can own the S&P 500 (to a cap), with a built-in buffer. It really is that simple.

If I were to step back and look at the overall investment landscape, over the past decade, most attempts to manage market risk without sacrificing growth have focused on low volatility and market-timing strategies (e.g., moving to cash when volatility hits).

However, even these strategies may still be exposed to periods of systematic risk (e.g., global crisis, large interest rate movements, recessions, and wars, to name a few). This played out last week, when the threat of a global virus sent markets plummeting. Systematic risk events have a low probability of occurrence, but they can have a significant negative impact on portfolio value if they occur, because these events affect the whole “system.”

I believe a clearer approach to hedging market risk exists, called Defined Outcome Investing, which seeks to provide investors with equity market appreciation, up to a cap, and reliable downside buffer levels over a specified period. In other words, investors can now know what their upside potential is, downside risk management level and outcome period, all before investing. Do investors need the protection they get from the Innovator buffer funds, or is it mostly a psychological support?
Bond: It’s both. I like to look at it like this: People insure their greatest assets. There's roughly a 0.3% chance of a house fire, but you still insure your house. Your chance of dying suddenly is extremely low as well, but we all still buy life insurance. If you go all the way back to 1926, the chance of a significant market loss is much greater than these other risks; upward of 25%.

What I’m getting at is the assets behind these premiums are worth insuring. And so is your retirement portfolio.1

Behaviorally, the common answer to overcoming portfolio volatility and large portfolio losses has been to stay invested in the market; continue saving and investing in your portfolio across all market conditions; when the market goes down, ride out the storm—eventually growth will return and the damage to your portfolio will be repaired. I believe this maxim is absolutely correct. But now, adding a buffer to your portfolio may help you stay invested for the long term. But don’t the markets tend to recover quickly from things like market corrections and black swan events?
Bond: It’s not necessarily the amount of time it takes the market to come back that hurts you. It’s the amount of time it takes your portfolio value to recover after a drawdown occurs. I think most advisors are familiar with the math behind this concept—if the market falls 10%, an investor’s portfolio will need to gain a little more than 11% to get back to whole. If the market falls 40%, you will need to gain 60% to get back to even.

Additionally, for someone like a retiree, who may need to withdraw their money during that drawdown, the problem becomes even worse. But if you are able to avoid those drawdowns altogether (or at least buffer a large portion of them), it puts you in a much better position to grow your portfolio value over time. Any other observations about your firm’s Defined Outcome ETFs?
Bond: One of the most touted benefits that we hear from financial advisors is the liquidity factor.

For decades, advisors were using structured notes and annuities to obtain structured outcomes on the market, but those products often come with long lockup periods, a lack of transparency on price and little liquidity.

The Defined Outcome ETF has brought liquidity into the structured outcome space. Investors can now buy and sell defined outcomes on multiple market indexes, any time the market is open. It’s made a huge difference in the value proposition of defined outcome products.

1. The Defined Outcome Series ETFs are not insurance products and do not guarantee to provide protection in the form of a downside buffer during down markets. It is possible to lose money.

The Defined Outcome ETFs seek to generate returns that match the Price Index, up to the Cap, while buffering against losses, before fees and expenses, over the course of a 1-year period. The Defined Outcome Series 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. There is no guarantee the fund will achieve its investment objective.

The Funds are designed to provide point-to-point exposure to the price return of an index via a basket of Flex Options. As a result, the ETFs are not expected to move directly in line with the index during the interim period. 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.

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 as 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 index losses during the Outcome Period. You will bear all index losses exceeding 9%, 15% or 30%. 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 predetermined 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.

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.