Complements To Bond ETFs Amid Rising Rates

Defined outcome ETFs may offer a solution for investors.

Reviewed by: Todd Rosenbluth
Edited by: Todd Rosenbluth

Key Takeaways

  • After record $207 billion of net inflows in 2021, fixed income ETFs have incurred net redemptions in January as investors reposition portfolios ahead of likely rate hikes.
  • We think defined outcome ETFs can be a complement to the fixed income portion of a portfolio, providing downside protection through limited volatility and modest upside potential in a finite time period.
  • For example, the Innovator U.S. Equity Ultra Buffer ETF - January (UJAN) and the Innovator Defined Wealth Shield ETF (BALT) have lower betas and standard deviations than popular fixed income ETFs, and these features helped protect against recent losses.

Fundamental Context

Investors are not rotating into fixed income ETFs even as stock market volatility picks up. The S&P 500 Index declined 8% year-to-date through Jan. 21, but fixed income ETFs incurred outflows on the heels of a record-breaking year.

Concerns about the Federal Reserve hiking interest rates multiple times in 2022 have contributed to the iShares 20+ Year Treasury ETF (TLT) and the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) suffering redemptions of $3.0 billion and $1.8 billion, respectively, to start the new year.

TLT's average duration of 19 years and LQD's 9.5 years make them less able to withstand the potential negative impact of rising interest rates. While investors have turned to other less sensitive fixed income ETFs, they likely are still looking for alternatives that can counterbalance the downside of investing in a fund with traditional S&P 500 exposure.

Defined outcome ETFs provide downside protection with some upside potential using Flexible Exchange (FLEX) options on the SPDR S&P 500 ETF Trust (SPY). In August 2018, Innovator ETFs launched the first suite of S&P 500 Index-based "buffer ETFs," which were designed to provide broad market exposure for a finite period of time but with downside protection in exchange for capped exposure to the upside.

Innovator ETFs offers three versions of the ETFs in this initial series—one with 9% protection, one with 15% protection and one with 30% protection—to appeal to investors with different risk profiles.

Since the summer of 2018, other asset managers—including Allianz, First Trust, Pacer and TrueShares—launched their own suites of products. Innovator ETFs ultimately launched S&P 500 Index-focused ETFs with 12-month outcome periods for each month throughout the calendar year. The January series includes UJAN, which has downside protection up to 30% for 2022 but has capped upside of 6.89%.

From its early January 2019 inception through Dec. 31, 2021, UJAN rose 25.2%, underperforming the 27.5% gain for fixed income ETF LQD. Yet compared to the S&P 500 Index, UJAN offered a lower beta (0.35 versus 0.47) and standard deviation (7.8% versus 11%). Year-to-date through Jan. 21, UJAN was down just 3.1%, less than half the loss for the S&P 500 Index.

Different Angle

Innovator launched an even more risk-conscious defined outcome ETF in July 2021. While UJAN and most other defined outcome ETFs provide downside protection during a 12-month period, the rough start to equity markets in 2022 likely has some investors focusing on a shorter period of time. BALT rolls into a new basket of options at the end of each quarterly outcome period, with a buffer of 20%. In its first two quarters of trading, BALT had upside caps of 0.70% and 1.00%, respectively. For the first quarter of 2022, BALT had upside of 0.90%.

In the second half of 2021, BALT's beta relative to the S&P 500 Index of 0.09 is comparable to that of the $91 billion iShares Core U.S. Aggregate Bond ETF (AGG), which had a beta of 0.11 during the same time period. Yet BALT's 0.82% total return was stronger than AGG's fractional loss of 0.11%, while incurring significantly less volatility (1.7% standard deviation versus 3.7%). AGG incurs an average duration of 6.7 years.


While defined outcome ETFs do not provide an income component like fixed income ETFs, current low bond yields make it difficult to generate a positive return and hedge rate risk.

We believe these downside protection ETFs can have their place in a portfolio, complementing popular fixed income ETFs. They can offer similar or better risk attributes while maintaining some exposure to the returns of the U.S. equity market.


All of the views expressed in this research report accurately reflect the research analyst’s personal views regarding any and all of the subject securities or issuers. No part of the analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information and disclosures, please refer to CFRA’s Legal Notice at

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Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence’s equity and fund business in October 2016. Follow him at @ToddCFRA.