Innovator, Calamos Add 100% Protection ETFs

Defined outcome ETFs are feeding demand from risk-averse investors.

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Jeff_Benjamin
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Wealth Management Editor
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Reviewed by: etf.com Staff
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Edited by: James Rubin

The Aug. 1 debut of two more ETFs offering 100% downside protection in exchange for caps on upside performance underscores the growing appeal of defined outcome funds, a fledgling category that has attracted approximately $1.3 billion in less than 18 months.

The Innovator Equity Defined Protection ETF 1-Year August (ZAUG) and the Calamos S&P 500 Structured Alt Protection ETF – August (CPSA) each extend the 100% downside protection series of the respective ETF issuers. As with any ETF offering full or limited downside protection, the price for that insurance is paid in the form of capped upside performance.

ZAUG, which charges 79 basis points, caps the upside performance over the 12-month life of the ETF at 8.82%. CPSA, which charges 69 basis points, caps the upside at 8.74%.

Demand among wealth managers for the ETF structure, which employs options to replicate the performance of an underlying stock index, has risen because of its appeal to older and risk-averse investors.

Matt Kaufman, head of ETFs at New York-based Calamos Investments, said the so-called defined outcome ETFs are starting to stack up favorably against such portfolio management stalwarts as Certificates of Deposit and annuity products that offer similar performance buffers.

“When you offer 100% protection you can unlock conservative bond portfolios and tap into some of the money sitting in cash,” he said.

As ETFs with 12-month lifespans, the structure is often compared to that of a 1-year Treasury bond, which is paying a yield of 4.78% on Aug. 1.

Kaufman compares that 12-month risk-free yield to an upside cap of nearly 9%, which sounds attractive. But it is important to understand that one is virtually guaranteed, and one is dependent on where the benchmark S&P 500 Index is at 12 months from today.

ETF Investors Seek Downside Protection

Most issuers of defined outcome and buffered ETFs offering degrees of downside protection insist the capped performance is less important to risk-averse investors than is the downside protection. It is for that reason these ETFs are sometimes referred to as “Boomer Candy.”

etf.com: BUFR three-month flows

“A large part of the demand for these products has been from investors looking to put sidelined cash to work as the stock market hovers around all-time highs,” said Bruce Bond, chief executive of Innovator Capital Management in Wheaton, Ill.

The upside performance cap is determined both by the amount of downside protection provided and the cost of the options necessary to offer that protection.

In essence, if the yield on the risk-free Treasury bond falls, the upside cap on the next ETF in the series will also be lower.

“Back of the envelope calculation, we’ll be able to deliver about twice the one-year risk-free rate,” Kaufman said of ETFs offering 100% downside protection.

And less protection equals more upside potential.

Based on current yields for the 1-year Treasury, Kaufman said a buffered ETF issued on Aug. 1 absorbing the first 10% on the downside would be able to push the upside cap to nearly 16%.

And if that downside buffer was pushed to 15%, the cap would drop to below 14%, he said.

Jeff Benjamin is the wealth management editor at etf.com, responsible for coverage related to the financial planning industry. This includes writing, hosting podcasts, webinars, video interviews and presenting at in-person events.


Jeff is a veteran journalist with more than 30 years’ experience covering the financial markets. He has won more than two dozen national and regional awards for his reporting. He most recently worked as a senior columnist at InvestmentNews where he wrote about investment products and strategies, as well as the broader financial planning industry. Prior to that, Jeff worked as an analyst at Cerulli Associates where he researched and wrote reports on the alternative investments industry. Jeff also worked as a money management reporter at Dow Jones Newswires, where he covered the mutual fund industry.


Based in North Carolina, Jeff is a former Marine and has a bachelor’s degree in journalism from Central Michigan University.

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