Innovator launches 100% buffer ETF, calling it an industry first

Innovator Capital Management, which pioneered defined outcome ETFs, said it has launched a first-of-its-kind ETF, which aims to offer investors equity market exposure up to a cap while providing a 100% buffer against downside losses.

The Innovator Equity Defined Protection ETF seeks to provide the upside return of the SPDR S&P 500 ETF Trust, known by the ticker SPY, up to a 16.62% cap while providing a 100% buffer against SPY losses over a two-year outcome period, Innovator said in a Tuesday news release.

"When investors become concerned about market conditions, we see a surge of dollars move into bank deposits, cash, market-linked CDs, and Treasuries," Graham Day, chief investment officer, said in the release. "We continue to hear that investors are looking for a way to get back into the market without sitting on the sidelines, but that the level of risk is simply too high."

Innovator's aim is for the new fund "to provide a way for our clients to stay in the market with significant built-in risk management," Mr. Day said. Prior to the launch of the new ETF, Innovator's buffer ETF lineup offered buffer levels ranging from 9% to 30%, an Innovator spokesman said. The new fund has a 0.79% expense ratio according to a fund overview on Innovator's website.

Innovator listed its first buffer ETFs — the world's first defined outcome ETFs — in August 2018, the spokesman said.

Since then, competitors including First Trust and, more recently, BlackRock have followed. BlackRock, the world's largest asset manager, on June 30 debuted its first buffer ETFs with the launch of the iShares Large Cap Moderate Buffer ETF and the iShares Large Cap Deep Buffer ETF. Each of the BlackRock ETFs has a 0.50% expense ratio, a BlackRock news release announcing their launch noted.

While it's possible that buffer ETF competitors will follow Innovator's lead with regard to the new strategy, "this one does not seem particularly enticing for investors so other asset managers may take a wait-and-see approach," said Bryan Armour, director of passive strategies research for North America at Morningstar Research Services, a Morningstar subsidiary.

"I don't expect this ETF to be in high demand," he said. "It's effectively a slightly riskier version of T-bills, with a much higher cost."

Innovator expects that the new fund will compete with T-bills and other cash-like instruments, said Tim Urbanowicz, head of research and investment strategy at Innovator. "Not only do investors have significantly higher upside potential, with 100% downside protection, but it's also important to factor in the potential tax advantages as well," Mr. Urbanowicz said.

Innovator has roughly $14 billion in total assets under management, the Innovator spokesman said.