Risk Management Made Easy

Risk Management Made Easy

Over the last three years, defined outcome ETFs have reshaped how advisors and investors manage risk.

Reviewed by: Jessica Ferringer
Edited by: Jessica Ferringer

In early August, the first defined outcome ETFs will celebrate their third birthday, an anniversary often considered to be a critical milestone in the evaluation of a fund. Since the launch of those funds, the defined outcome landscape has grown significantly, with roughly 130 U.S.-listed ETFs now available.

With the bull market in its second year, and valuations sitting significantly higher than they were a year ago, it is no surprise that ETFs that are meant to protect against a downturn have seen growing interest from investors and issuers alike.

In the first six months of the year, 30 defined outcome ETFs were launched by issuers. This is a faster pace than the first six months of 2020, and matches the number of launches in the category for all of 2019. In total, defined outcome ETFs hold more than $8 billion in assets under management.

Along with the growing likelihood of a downturn in equities, Treasury yields have fallen back to historically low levels. Since yields have an inverse relationship with prices, any increase in the level of yields will reduce the price return of bonds.

With yields already so low, the fixed income market is unable to offer as much protection should equity markets experience a downturn. Defined outcome ETFs can be a different way to take risk off the table for cautious investors, such as those heading into retirement.

Overview Of Defined Outcome ETFs

At their most basic level, defined outcome ETFs are products that provide exposure to an index and provide downside protection in exchange for limited upside. They do this by using flexible exchange (FLEX) options.

These options are customized equity or index contracts that can be tailored to target specific strike prices, reference assets and expiration dates, with no position limits. The settlement of FLEX options is also guaranteed by the Options Clearing Corporation, which removes counterparty risk that is usually present in options transactions.

Initially, these FLEX options were based on an index. However, due to an SEC approval of a Cboe Global Markets rule change in October 2019, most of these ETFs now use options that are based on another ETF that tracks an index, such as the SPDR S&P 500 ETF Trust (SPY).

The rule created a path for options-based ETFs to be more tax efficient by taking advantage of in-kind transfers that had previously only been available to traditional ETFs. The full tax benefit from this rule change is available to fund-based options since index-based options are treated as a sale upon transfer.

Setting Cap & Buffer

An important feature of these funds is the outcome period. At the beginning of each outcome period, the parameters for the ETF—such as their cap and buffer—are set.

At the conclusion of the outcome period, the fund will rebalance into a new one-year outcome period and the parameters may change. This event is not considered a taxable event for the investor.

Some defined outcome ETFs rebalance quarterly, while others do so on an annual basis. Funds that reset on a quarterly basis tend to track the reference exposure more closely. This is due to less time value embedded in the purchased options.

First To Market

Innovator was the first to market, releasing three ETFs in August 2018 that provided exposure to the S&P 500 with differing levels of downside protection. Since then, the space has evolved, with roughly 130 funds currently traded on U.S. markets holding more than $8 billion in total assets.

The products have become more complex and innovative as well. Here we offer a summary of the main issuers in the space and provide an overview of their lineups.




Along with being the first to market, Innovator has the most extensive lineup of any defined outcome ETF issuer.

The issuer offers six reference exposures: S&P 500, Nasdaq 100, Russell 2000, MSCI EAFE, MSCI EM and 20+ Year Treasuries. The vast majority of these products rely on fund-based options, though a few use index-based options. Innovator is in the process of transitioning the funds that use index-based options as each monthly series resets. By Dec. 1 of this year, all S&P 500 Buffer ETFs from Innovator will rely on fund-based options. Products may reset on a quarterly or annual basis depending on the fund.

Innovator offers several different buffer levels across their lineup. The “Buffer” products offer protection against a 9% drop, while the Power Buffer products protect against 15% in losses. The Ultra Buffer funds offer the most protection, shielding against 30% of losses. The Ultra Buffer funds do not kick in until after the first 5% in losses over the outcome period.

Innovator has recently launched the Accelerated and Stacker defined outcome ETFs. The Accelerated ETFs provide double or triple the exposure to the upside, with single exposure to the downside, with one version offering some downside protection as well.

The Stacker ETFs also seek to provide triple upside exposure to a blend of SPY, the Invesco QQQ Trust (QQQ) and the iShares Russell 2000 ETF (IWM), while limiting downside exposure to that of SPY alone.

The issuer also offers the Innovator Defined Wealth Shield ETF (BALT), which provides upside to a cap while buffering against 20% in losses with a quarterly reset.

First Trust

First Trust was the next issuer on the scene, partnering with Cboe Vest to launch four defined outcome ETFs in November 2019. The issuer offers buffered ETFs on four reference assets: S&P 500, Nasdaq 100, MSCI EAFE and gold. All of the ETFs use fund-based options.

There are two main buffer ranges used by the First Trust Cboe Vest funds. The Buffer ETFs protect against the first 10% in losses, while the Deep Buffer ETFs protect against 25% in losses but don’t kick in until after the first 5% drawdown.

The majority of these ETFs rebalance on an annual basis, with the exception of the FT Cboe Vest Gold Strategy Quarterly Buffer ETF (BGLD), which resets quarterly.


AllianzIM entered the defined outcome space in May 2020. This issuer has taken a more streamlined approach to its lineup thus far, with all of its ETFs targeting the S&P 500 with an annual outcome period.

The issuer offers two flavors of downside protection: a 10% buffer or a 20% buffer. In line with its simplified lineup, AllianzIM also offers its funds at a lower price relative to the other options in this space, charging 0.74%. This is cheaper than Innovator’s lineup, which averages around 0.79%, as well as First Trust’s lineup, which charges 0.85%.

TrueShares launched its first Structured Outcome ETF in June 2020. The issuer now offers 12 of these funds, with an outcome period beginning at the end of each month. All funds offer a downside buffer range of 8%-12% and rebalance on an annual basis.

Rather than offering a hard cap on the return of the ETF, TrueShares quotes an estimated upside market participation rate. At this time, estimates range from a low of 75% to a high of 89% depending on the fund.

Pacer is the newest entrant to the defined outcome space, having launched its first three defined outcome ETFs in December 2020. The issuer refers to its lineup as the Swan SOS (Structured Outcome Strategies) ETF series.

The Conservative funds kick in after the first 5% drawdown, protecting investors against the next 25% in losses. The Moderate version protects against the first 15% in losses.

The Flex option is the most unique in Pacer’s lineup. These funds buffer investors against the first 20% of losses on the downside. For the next 20% of losses, the fund will decline 2% for every 1% decline in the S&P 500. In exchange for this amplified loss, the fund offers significantly higher caps than either the Conservative or Moderate version.

Education Is Key

While defined outcome ETFs are an appealing way to mitigate risk in a portfolio, these are complex products relative to more traditional equity or fixed income ETFs.

Advisors first need to identify which fund will be the best fit for their clients’ portfolios, and must also decide whether the allocation will come from the equity or the fixed income portion of the portfolios.

Phon Vilayoune, founder and CEO of Veta Investment Partners, uses different buffer ETFs depending on whether the fund is being used as an equity or bond replacement.

Veta Investment Partners uses buffer ETFs across its model portfolios, accounting for approximately 10-15% of the total allocation. Vilayoune prefers using defined outcome ETFs with a 10% buffer, such as the AllianzIM U.S. Large Cap Buffer10 Jul ETF (AZAL), as an equity replacement, while those with a 20% buffer, like the AllianzIM U.S. Large Cap Buffer20 Jan ETF (AZBJ), are more suitable as a bond replacement.

Drawdown Insurance

Regan Teague, advisor and senior investment officer at Day Hagan Private Wealth, prefers to use ETFs with a 30% buffer, such as the Innovator S&P 500 Ultra Buffer ETF – January (UJAN), for his clients. While drawdowns of this level are rare, they can have a significant impact on the client’s ability to achieve their investment goals, especially for older clients.

Though all of the advisors that ETF.com talked to considered different factors when doing their due diligence, issuer support was seen as an important part of the process, not only to support the advisor’s understanding but in facilitating client education.

In addition, ETF issuers play a key role in understanding the fund’s outcome period as well as the remaining cap and buffer. And in up markets such as the one we’re currently in, advisors also need to understand how much an ETF could fall before the buffer takes effect.

It is important to remember that these metrics are constantly changing based on market movements and the passage of time. These are funds that need to be actively managed within client portfolios in order to receive the promised benefit.

Jessica Ferringer can be reached at [email protected]

Jessica Ferringer, CFA, is a writer and analyst for etf.com. She has 10 years of experience in investment research and due diligence, including helping to manage ETF portfolios. Jessica has a bachelor’s degree in economics from Lafayette College and an MBA from the University of Pittsburgh.