New S&P 500 ETF For Risk Averse

August 29, 2018

Innovator Funds is launching today an S&P 500 ETF with loss aversion in mind.

The Innovator S&P 500 Buffer ETF (BJUL), listing on Cboe Global Markets (ETF.com’s parent company), invests in custom S&P 500 FLEX options that vary in strike price, but that share the same expiration date.

This options portfolio is designed to offer investors exposure to some of S&P 500 price returns while providing a buffer in a down market. BJUL is the third ETF the firm has rolled out as part of its defined outcomes ETF lineup this month.

Specifically, BJUL comes to market delivering 9% downside protection—if the S&P 500 drops as much as 9%, you are protected—and it also allows you to capture as much as 10.85% in upside gains. It’s a range in market participation designed to allow investors to know their potential outcome, according to Innovator Funds’ Bruce Bond.

Providing Predictable Outcomes

“This type of strategy has long been offered as a structured product or at insurance companies, but it hasn’t really been available in ETF form,” Bond said. “It’s about providing predictable outcomes to investors: 'This is what you are going to get.’”

BJUL’s outcome range is based on the first day it trades. If you enter the fund down the road, your outcome may be different based on market action that already took place, but Innovator has created an online tool that allows you to know exactly your downside/upside caps upon entry, no matter the day, within the fund’s 12-month duration. BJUL resets once a year in July when a new cap is set based on market conditions.

The fund is part of a series of ETFs, each delivering different buffer ranges based on market conditions at the time the options portfolio is put together. The so-called July series includes now three ETFs: BJUL, the Innovator S&P 500 Power Buffer ETF - July (PJUL), offering 15% downside protection, and the Innovator S&P 500 Ultra Buffer ETF - July (UJUL), offering a 30% safety net.

Implementation Possibilities

Some implementation possibilities for BJUL include the replacement of some large-cap allocation where you may be concerned about high correlation or lack of diversification in your portfolio. According to Bond, the fund could also be used as an alternative to some fixed-income exposure for those who turn to fixed income for protection.

These strategies, each resetting annually in July, are part of a series Innovator plans to launch that will consist of quarterly funds, the next round coming in October.

That means that BJUL could be used as a long-term holding that resets its portfolio once a year, or it could be a tactical position that you roll out of and into the next one—say, October—if market conditions have changed dramatically. That’s the plan, at least, according to the firm. But for now, only the July series is available—the first to be launched.

BJUL costs 0.79% in expense ratio, and that’s a unitary fee, so it covers all costs associated with the ETF. Innovator has eight ETFs in all today, including BJUL, with combined assets of about $750 million.

Contact Cinthia Murphy at cm[email protected]

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