Structured not Stirred

USA

Innovator ETFs lists annuity-like ETFs, offering defined outcomes

Innovator ETFs, an Illinois-based provider backed by PowerShares founder Bruce Bond, is listing a suite of defined outcome ETFs that lock in certain returns on the S&P 500. The new ETFs buy and sell options to protect investors from downside risk while capping the gains they can receive.

  • Innovator S&P 500 Buffer ETF — July (BJUL)
  • Innovator S&P 500 Ultra Buffer ETF — July (UJUL)
  • Innovator S&P 500 Power Buffer ETF — July (PJUL)

The difference between each of the three ETFs is the outcomes they lock in. The Buffer fund (BJUL) will protect investors from the first -10% of S&P 500 losses. Investors wear any losses beyond 10%. The prospectus leaves blank the area specifying what the upside cap will be, but does provide the following explanatory image:

The Ultra Buffer (UJUL) will provide protection from -5% to -35%, meaning investors must wear the first -5% drop in the S&P 500 but are protected from there down to -35%. Again, we could find no mention of the upside cap.

The prospectus for Power Buffer (PJUL) provides no gleanings on where the caps and buffers lie.

 

Analysis – beware of missing the lockup period

The three ETFs are certainly innovative, but investors should understand that delayed purhcase (i.e. a missed lockup period) can have serious consequences. If an investor buys into the fund too late – i.e. after the lockup period has already begun – and the fund has risen in value nearing the cap, they may receive zero upside. Similarly, if an investor buys in after these ETFs have fallen in value beyond the buffer, they will receive zero downside protection.

 

The prospectus warns: “You should not consider this investment if… you have not visited the Fund’s website and do not understand the investment outcomes available to you based upon the timing of your purchase.” Investors take note.