Innovator: Defined Outcome Products Gaining Tremendous Steam

New product concept helps investors invest in the market with a built-in buffer.

Reviewed by: ETF Report Staff
Edited by: ETF Report Staff

Bruce Bond

Co-founder & CEO
Innovator Capital Management


Bruce Bond is co-founder and CEO of Innovator Capital Management. Having co-founded PowerShares Capital Management in 2003, he is recognized as one of the pioneers of the ETF industry. Bond has returned to the ETF industry with a fresh take on risk management: Defined Outcome ETFs. The funds allow investors to participate in the upside offered by the stock market while limiting downside risk. 

What was the motive behind launching Defined Outcome ETFs?
The Defined Outcome ETF line is essentially the reason I came back into the ETF industry.

Post-PowerShares, I still kept a close eye on the ETF market. Over the last two decades, a proliferated universe of ETF issuers had chopped the market into thousands of pieces. I didn’t see a lot of opportunity left to innovate within that crowded construct; the idea of coming back to fight over a small percentage of assets among over 100 other ETF issuers was not all that appealing.

The one thought that always bothered me though was that most of the ETFs out there left everyone “naked in the market.” Millions of people invest in the equity markets through ETFs, but they are generally exposed to the full risk (and reward) of the market. This downside risk has always just been an accepted reality of investing in the stock market, and folks would use bonds to reduce their risk (and to generate income). Given today’s low rate environment, as millions of baby boomers enter retirement, they can no longer rely on the fixed income markets for income or for risk management, nor can they depend on volatile equity markets to turn growth into income. The same is true for any institution with a risk management goal, or a spending mandate, like a defined benefit plan.

We worked through several iterations of potential solutions to this problem, and once we felt like we landed on something the market could benefit from, we decided to reenter the market. We’re here to lead, to innovate, and to pioneer new solutions that really serve the needs of investors today, in a way they never thought possible

You now have a full suite of 36 S&P 500 funds; what about the other indexes your products target?
We made a concerted effort to build the largest suite of Defined Outcome ETFs in the world, and to do it quickly. We started issuing quarterly series of three buffer levels (9%, 15% and 30%) on the S&P 500, and once we hit internal AUM targets, we moved to monthly issuance. We’ve taken the same “quarterly first” approach on several other indexes as well—MSCI EAFE, MSCI Emerging Markets, Russell 2000 and NASDAQ-100—allowing investors to seek to build diversified equity portfolios on key stock market exposures with built-in buffers.

The demand and growth trajectory of Defined Outcome ETFs feels very similar to when we built the first smart beta ETFs in 2003, only this time, there were more eyes on us (and on the ETF space in general); so we’ve moved fast to offer investors a growing range of tools that can help them achieve their goals.

How do you see advisors implementing these Defined Outcome ETFs in their client portfolios?
We are seeing three core uses: 1) de-risking equity exposure; 2) replacing fixed income exposure; and 3) replacing alternatives exposure.

Advisors are taking a portion of their equity exposure (or in some cases, all of their equity exposure) and moving that into the buffer ETFs. Many of them are saying, “With the economic uncertainty of this pandemic, I don’t want to risk more downside than I have to right now. I’m going to buy a buffer for my clients’ equity exposure.”

The other thing we’re seeing advisors do is use Defined Outcome ETFs as a fixed income replacement. Yields on fixed income are near all-time lows, meaning prices are around record highs. Many advisors don’t feel there is much upside left unless rates go negative, and they aren’t willing to stick around for that. So they are moving to buffered ETFs.

Lastly, the simplest place that we see people use it is as a replacement in their alternatives sleeve. In many instances where an advisor was using some kind of hedged strategy that wasn’t well-understood or did not perform as expected in March, they are moving to something with a little more certainty, which the buffer ETFs seek to provide.

How do Buffer ETFs differ from other risk-managed ETFs in the marketplace?
If you look at most risk management strategies in existence today, they have, in a sense, “done what they are supposed to do.” But that doesn’t always equate to good outcomes for people. Many risk management strategies de-risk during volatile markets, moving to cash. This takes them out of the market. Look at March 24-25. Folks using more traditional risk management strategies may have missed 18% gains because they were sitting on the sidelines!

Defined Outcome ETFs don’t operate this way. Defined Outcome ETFs seek to provide investors with the upside of an equity market (e.g., NASDAQ-100) to a cap, with a built-in downside buffer, over an outcome period. They are invested in the market all the time, with a hedge that is always in place. The cost of that hedge is a capped upside participation. But the beauty of it is the upside cap is typically higher when markets are volatile, which allows people to actually participate more fully in market upside exactly when they need it most. This approach just stands in such stark contrast to other risk management approaches; I think it’s important to understand the difference.

The ability to actually know your potential outcome provides a lot of comfort for people. It eliminates the emotional bias.

Tell me about products you’re thinking of for the future. Is this truly a new “revolution” in the ETF space?
I think it is. We’ve seen more than $4 billion in AUM pour into Defined Outcome ETFs over the past couple years since we launched the first products, much of which has come in over the past several months. The Defined Outcome ETF concept is gaining steam, and we are seeing competitors enter the market, which I think will spread the message even quicker than if we did it solo.

We are just getting started though. One ETF we are very excited about bringing is an ETF of Buffer ETFs. The Innovator Laddered S&P 500 Power Buffer ETF (BUFF) will track an index comprising the 12 monthly Innovator S&P 500 Power Buffer ETFs. The index is designed to ladder the 12 underlying ETFs that seek to provide upside to U.S. equities (subject to caps) while each buffering against the first 15% of U.S. equity losses over a 12-month period. Each of the 12 ETFs in the index is assigned an equal weight and will rebalance on a semiannual basis. This ETF diversifies you across the entire product range of 15% buffers, offering what we believe will be a very smooth ride.

BUFF: In July 2020, the Innovator Lunt Low Vol/High Beta Tactical ETF (LVHB) will undergo several important changes, including a replacement of the underlying index, investment objective and strategy, a change to the Fund name and ticker, and a reduction in the Fund’s total annual operating expense ratio.

The Funds seek to generate returns that match the returns of its benchmark Index, up to the Cap on potential upside returns, while limiting downside losses by a predetermined buffer, over the course of a 1-year period. There is no guarantee the Fund will achieve its investment objective.

Investing involves risks. Loss of principal is possible. The Funds face numerous market trading risks, including active markets risk, FLEX Options 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.

Investors purchasing shares after an outcome period has begun may experience very different results than the Funds’ investment objective. 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. 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 this and other important Fund information.

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, a shareholder that purchases shares after the Outcome Period has begun may also lose their entire investment.

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.