Innovator Offers Upside With a Floor on Downside Risk

VettaFi recently spoke with Innovator ETFs co-founder and CEO Bruce Bond about how these ETFs can provide investors market upside with downside risk protection, how managed floor ETFs differ from defined outcome funds, and why now is the right time to bring these funds to the market.

VettaFi: Innovator ETFs just filed for two actively managed floor equity ETFs with the SEC. Tell us about these new funds and what type of investments they specialize in.

Bruce Bond: The idea with the new funds we’re doing with [the funds’ subadvisor] Parametric is to provide investors with the upside of equity markets while having a floor on their downside risk.

They’re like the defined outcome ETFs but a little different in that they don’t operate over specific outcome periods of a quarter or a year. While defined outcome funds have a buffer of 9% or 15%, these managed outcome ETFs represent a floor, where after that, you can’t lose any more.

There are not many products like this available in the industry. We do expect these funds to give investors significant upside to the market while having this built-in floor.

VettaFi: What’s the difference between a defined outcome ETF and a managed outcome ETF?

Bruce Bond: With defined outcome, you have a specific period where the buffer is over. Defined outcome ETFs have specific periods, and for most of those the buffers are over one year. We offer these funds at the beginning of each month because that entry point is important. So, for example, let’s say you get 22% of the upside and a 9% buffer, that is a specific agreement we’re making with investors over that one-year period that they can rely on.

With managed outcome, the period is rolling. It tends to blend that specific number a little bit. We target a 10% floor every time, but since it’s done over time, it can tend to blend, so you don’t have a specific defined outcome, you have more of a managed outcome.

This is an actively managed portfolio, therefore, your floor’s around 10%, so it’s not a specific outcome you’ll receive at the end of the year. That’s the reason why we can’t provide a specific outcome.

With defined outcome, the entry point is important; you need to get in at the beginning [of the specified period], whereas the entry point isn’t as important with these new managed outcome funds.

Also, defined outcome ETFs are made up of options contracts solely, whereas these new managed outcome funds have owned equities, and this is an overlay on those equities.

VettaFi: We’re currently in an environment of volatile markets and record high inflation. What makes this market ideal for these managed floor funds?

Bruce Bond: What makes it ideal is that if someone wants to get in today and wants to know they have a 10% downside risk in the market but are going to get a significant upside of the market, it takes away having to time this market perfectly. These funds allow advisors and investors to have a downside hedge against losses while at the same time having access to the potential upside of the market. For advisors, it’s a great product to have available to chop off that risk tail.

VettaFi: What are your long-term goals for these funds?

Bruce Bond: The 60/40 model has been challenged lately. It’s been holy grail over the last 10 years because rates have been staying low while stocks have been going up. But now, fixed income may not be providing [stability] and stocks may not be offering returns. So, this is another way for advisors and investors to get in the market but not be naked in the market and have no risk management exposure. This allows them to hop in with a risk overlay that gives them a certain amount of exposure and upside in the market. This is a great tool to be able to do that.

What we love about these strategies is you’re not depending on the timing of the market. It takes away a lot of the unknowns in the markets for investors.

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