Whether they’re in a high-stakes bowling game or wondering how to make a lump of cash last throughout retirement, Innovator Capital Management CEO Bruce Bond suspects that people with a lot on the line are probably willing to forego some upside if it helps them avoid the gutter.
“If you’re going to the bowling alley and you’ve got to put all your money down on one roll of the bowling ball down the alley, would you put the bumpers up or would you just risk a gutter ball?... I’d probably put up the bumpers,” he said.
That’s the basic idea behind buffer ETFs, said Bond, who co-founded Innovator with John Southard in 2017. Innovator’s buffer ETFs are designed to offer investors broad market exposure up to a cap with a built-in buffer against downside over a certain outcome period. Its buffer ETF lineup, which utilizes options and is primarily focused on equities, offers buffers ranging from 9% to 100%. It offers three-month, six-month, 12-month and 24-month outcome periods.
Innovator pioneered defined outcome ETFs, listing the world’s first three buffer ETFs in August 2018. Since then, rivals including BlackRock, the world’s largest asset manager, have also launched buffer ETFs.
“It’s very, very difficult to patent a financial product,” said Bond, which "is a shame to be honest with you because small firms like ours that are trying to get started, you can have the big guys just come in and copy everything you just did and you don’t have much of a way to protect yourself, although it’s something they would have never accomplished on their own.”
Buffer ETFs are “sophisticated products and … they take some explaining,” said Bond, whose firm in July 2023 also listed the industry’s first 100% buffer ETF.
“They’re really institutional-level products and we’re just taking the time to … make them as simple as we can and bring it down to advisers’ and sometimes … retail investors’ level,” he said. “But by and large, RIAs are really moving into this category. They’re the biggest users.”
Bond, who with Southard also co-founded PowerShares Capital Management, which they sold to the firm now known as Invesco in 2006, “came out of the retail side,” he said.
“We haven’t spent a lot of time marketing to institutions,” he said, adding that Innovator considers big RIAs to be institutional-like clients.
While Innovator hasn’t courted the pension fund and other asset owner crowd, Kevin Becker, CEO of Kiski Group, a portfolio analytics firm serving institutional clients, has found a lot to like about Innovator’s buffer ETFs.
“These products fit really well into institutional portfolio construction,” said Becker, whose firm serves long-only asset managers and hedge funds as well as pension funds, endowments and family offices. “Certainly, they’ve been traded by our asset manager clients. They have been deployed in some of the allocator clients we have and they’re being diligenced by more.”
Becker declined to name any of those clients or specify which of the different types of allocators that Kiski works with were using buffer ETFs. He did say, however, that using buffer ETFs “frees up risk budget” for allocators.
Given the strong performance public equity markets have posted since U.S. stocks bottomed in October 2022, a pension fund for example might be looking for ways to protect those gains, Becker said.
“So, we bring (buffer ETFs) up in risk-budgeting conversations,” he said.
As with other types of ETFs, institutions are likely to take their time when it comes to adopting buffer ETFs, he said. However, buffer ETFs have now been around long enough for them to start hitting institutions’ radar screens, Becker said.
“No one is going to buy a two-year-old product,” he said, adding “BlackRock is now starting to issue buffer ETFs, which I think is legitimizing for the space; it’s not deleterious for the space.”
BlackRock, others moving in
BlackRock launched its first two buffer ETFs last year — the $79 million iShares Large Cap Deep Buffer ETF and the $47 million iShares Large Cap Moderate Buffer ETF.
On July 1, BlackRock launched the iShares Large Cap Max Buffer Jun ETF, which it described in a news release as “the most affordable max buffer ETF that targets up to 100% downside protection in the market.” BlackRock also plans to launch three more iShares Max Buffer ETFs, the release said.
The iShares Large Cap Max Buffer Jun ETF, known by the ticker symbol MAXJ, had net assets totaling $154 million as of Aug. 19, according to BlackRock’s website.
BlackRock has “seen broad interest in MAXJ since its launch,” said Rachel Aguirre, a managing director and head of U.S. iShares product at BlackRock, in emailed comments.
“While most investors of our buffer ETFs are in the financial advisory community, we are also seeing interest from institutional clients to better understand how they could leverage buffer ETFs and options ETFs more broadly to pursue more precise outcomes within portfolios,” Aguirre said. “As investors increasingly turn to ETFs as a preferred vehicle to access these types of strategies, we expect this trend to continue and will see more use cases among institutional investors including asset managers and family offices.”
All three of the iShares buffer ETFs that are currently trading have net expense ratios of 0.5%. Meanwhile, three of the four new buffer ETFs that Innovator listed on Aug. 1 — including its seventh 100% buffer ETF — each had an expense ratio of 0.79%. The fourth had a 0.85% expense ratio.
And BlackRock is far from the only imitator.
Calamos Investments announced in April plans to launch a suite of “structured protection ETFs,” which would seek to provide 100% downside protection with equity upside to predetermined caps over one-year outcome periods.
So far, Calamos has launched five structured protection ETFs, which as of Aug. 16 had net assets totaling $259 million.
"Approximately 10% of our structured protection ETF assets under management is institutional,” said Matt Kaufman, senior vice president and head of ETFs at Calamos. “Conservative institutions that don't have an appetite for balance sheet risk but want to tie their capital to the growth potential of equities are interested in 100% downside protected strategies...”
Kaufman declined to name those institutions.
While Innovator has been approached by firms interested in acquiring it, “right now, … we’re just trying to grow the business, and we think that the upside is substantial,” Bond said.
