The Innovator U.S. Equity Defined Protection ETF seeks to track the return of SPDR S&P 500 ETF Trust (SPY) to a 16.62% cap with a 100% downside buffer protection over a two-year outcome period. Investment products keep getting more and more innovative over time – even when we’re talking about humble index ETFs that are supposed to track market indices like the S&P 500.
Listed on 18 July 2023 on Cboe BZX, the Innovator U.S. Equity Defined Protection ETF is an exchange-traded fund that seeks to provide exposure to the U.S. stock market while also providing downside protection. The fund uses options contracts to limit losses in the event of a market downturn.
It is designed for investors who want to participate in the potential gains of the stock market while also protecting their portfolio against potential losses.
The Innovator U.S. Equity Defined Protection ETF is managed by Innovator Capital Management.
Key Takeaways
- Innovator U.S. Equity Defined Protection ETF offers a 100% downside buffer and a cap on upside potential.
- Investing in this ETF may offer reduced risk and the potential for higher returns over the long term.
- As with any investment, there are potential risks and challenges to consider before investing in Innovator U.S. Equity Defined Protection ETF.
What is Innovator U.S. Equity Defined Protection ETF?
Innovator U.S. Equity Defined Protection ETF (TJUL) is a buffer ETF launched by Innovator Capital Management on July 18, 2023. This ETF is designed to provide investors with a way to participate in the stock market while limiting their downside risk.
The Innovator U.S. Equity Defined Protection ETF seeks to track the return of SPDR S&P 500 ETF Trust (SPY) to an upside cap of 16.62% prior to fees with a 100% downside buffer protection over a two-year outcome period.
One of the main benefits of the Innovator U.S. Equity Defined Protection ETF is that it provides investors with a way to participate in the stock market while limiting their downside risk.
This can be especially important for investors who are concerned about a potential market downturn or who want to protect their portfolio from large losses.
Another benefit of the Innovator U.S. Equity Defined Protection ETF is that it has a defined outcome. This means that investors know exactly what they can expect from the ETF and can plan accordingly.
Additionally, the ETF has an expense ratio of 0.79% which makes it an interesting option for investors who are looking for a “low-cost” way to participate in the stock market while limiting their downside risk.
Innovator Buffer ETFs are a revolutionary product line that offers investors exposure to the price return of a broad equity market (e.g., U.S. equity, emerging markets, international, developed), up to a cap, with built-in downside buffer levels, over an outcome period of approximately one year.
Historically, these types of defined outcome strategies have only been available through certain banks and insurance products. Today, a revolutionary ETF alternative exists to help you invest in the equity markets with confidence.
In a nutshell, the ETF will be using a collection of put and call options to try and protect against any market losses over a two-year period.
Potential Risks Of Buffer ETFs
Innovator has said there is no guarantee the fund will be successful in providing protection.
Also, take note that if the time period for the investment has started and the ETF (a type of investment) has subsequently gone up in value, any increase in the investment will not be protected by a safety net called the Buffer.
This means that the investor may lose money until the ETF goes back to its original value at the start of the investment period.
- Let’s say the ETF launches at a price of US$25 on 18th July 2023 and the price is now US$30 on 1st August 2023.
- Assume that I buy the ETF on 1st August 2023 at US$30 and it goes back down to US$25 on 18th August 2023.
- This US$5 loss will not be protected by the buffer – only price declines beyond the original launch price of US$25 would be protected.
- It is extremely important to take note of the launch date and launch price of the ETFs.
If investors are looking at mitigating market risk, I’m not sure if they should even be considering such an investment product.
Remember there is no guarantee the fund will be successful in providing 100% downside protection.
Consider the possibility of extreme market volatility affecting the prices of calls and puts, coupled with significant fund inflows, which could potentially affect the normal operation of the ETF when under significant stress.
Adding in the fact that there will be no dividends paid out for this ETF despite tracking the S&P 500, this is another layer of the hidden cost we have to shoulder.
Innovator Buffer ETFs Vs BlackRock Buffer ETFs
BlackRock will always dip their toes into places where there is money to be made, which we can see from the filing of iShares Bitcoin Trust with the SEC.
Unwilling to be outdone, it is no surprise that BlackRock has launched both the iShares Large Cap Moderate Buffer ETF (CBOE:IVVM) and the iShares Large Cap Deep Buffer ETF (CBOE:IVVB) on 30th June 2023.
Similar to Innovator Buffer ETFs, iShares Buffer ETFs also use options to seek to track the share price return of the iShares Core S&P 500 ETF up to an approximate upside cap.
At the same time, market downturns are mitigated by seeking to provide an approximate buffer against iShares Core S&P 500 ETF losses within target ranges.
- iShares Large Cap Moderate Buffer ETF (IVVM) strives to protect against quarterly losses for the first 5%
- iShares Large Cap Deep Buffer ETF (IVVB) strives to protect against quarterly losses ranging from 5% to 20%
BlackRock is on a clear path to muscle market share from Innovator by pricing in an aggressive expense ratio of 0.5% for both ETFs which is much lower than Innovator’s.
In the case of BlackRock’s Buffer ETFs, the risks appear when market extreme behaviour happens.
- The market is up a lot and the Buffer ETF will not enjoy capital gains beyond the cap (opportunity cost)
- The market is down a lot and the Buffer ETF is exposed to losses beyond what is protected (capital risk)
How To Invest In Innovator U.S. Equity Defined Protection ETF
Using the specified tickers for these Buffer ETFs, you can easily find and invest in them just like how you would invest in the largest S&P 500 ETFs in the world such as SPDR S&P 500 ETF Trust (SPY), iShares Core S&P 500 ETF (IVV) and Vanguard 500 Index Fund (VOO).
Below is a screenshot showing Innovator U.S. Equity Defined Protection ETF, iShares Large Cap Moderate Buffer ETF and iShares Large Cap Deep Buffer ETF in my Syfe Trade mobile app – there is nothing special about them at all.
Ending Thoughts
What I have shared in this article are buffer or defined outcome ETFs and they offer investors exposure to the price return of broad equity markets to a cap, with built-in downside buffer levels, over a specified outcome period at which point each ETF will reset.
Defined outcome or buffer ETFs is something that is 100% new and interesting to me, considering that I’m pretty much a dinosaur when it comes to the various investment products that are available.
Would I be investing in something like this? Probably not.
I hope that you have learnt something new from this blog post. Thanks for reading!
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At the age of 30, I am the Personal Finance Blogger who laid claim to a negative net worth of minus $25,755 – and decided to turn things around.
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