First ETF with 100% loss protection launched in US

The world’s first exchange-traded fund to provide 100 per cent protection against losses is set to launch in the US on Tuesday.

Innovator US Equity Principal Protected ETF The increasingly popular “buffered” ETF will stretch the concept to its limits.

“This is something we’ve been looking at for a number of years,” said Graham Day, chief investment officer at Innovator Capital Management. “We’re starting to see a lot of interest in this type of product.”

To date, “defined outcome” funds have used derivatives to provide investors with some degree of downside protection — in exchange for giving up some potential gains — without attempting to protect against all losses, no matter what the market. Perform

For example, Innovator’s flagship Power Buffer range aims to protect investors against the first 15 per cent of market losses over the course of six months or a year, but not beyond that.

According to FactSet, defined outcome ETFs took off during last year’s turbulent markets, netting $10.9 billion in North America alone—the most developed market—up from a record $4.1 billion in 2021.

Despite better market conditions this year, they pulled in a further $4.6 billion in the first six months, even before BlackRock, the world’s largest asset manager, launched its first fund, potentially triggering a price war.

The Innovator US Equity Principal Protected ETF focuses on the S&P 500 Index and will use a series of put and call options to attempt to protect against any market losses over a two-year period. Further funds will be launched at six-monthly intervals.

However, investors may still be left out of pocket, given that the buffer is calculated before subtracting annual management fees, transaction fees and any “extraordinary” expenses incurred by the fund. The annual management fee is expected to be 79 basis points.

Market conditions, particularly volatility levels and prevailing interest rates, determine the level of the “cap”—the maximum return the ETF can generate over a two-year period.

Dey said he expects the first ETF to launch with a return of 15-18 per cent over a two-year period, or a range of 7.1-8.8 per cent on an annualized basis. Like other products offered by the innovator and its competitors, investors give up dividend income.

By comparison, since 2019, Innovator’s Monthly Series of S&P 500 Buffer ETF — which protects against the first 9 percent of losses — has averaged 17.4 percent over a 12-month period.

Its Power Buffer range — providing 15 percent downside protection — has an average upside cap of 11.9 percent, and its Ultra Buffer range — from -5 percent to -35 percent — protects against losses of 9.7 percent.

The innovator, which is the largest provider of defined outcome ETFs with $13.5 billion in assets, envisions the new fund as an alternative to the “antiquated” annuity market, as a way to “disrupt” the market for products offered by insurance companies. Presenting as

Sales of fixed-indexed annuities, which provide basic protection, rose 42 percent year-on-year in the US to $23.1 billion in the first quarter of the year, setting a record for the third consecutive quarter. life insurance market research association,

“Trillions of dollars have come into the economy (as a result of the COVID stimulus programs) but are sitting on the sidelines in cash, money market funds and bank deposits,” Dey said.

Yet historically, he argued, increasing exposure to equities, even with an upper limit, has generated returns greater than cash over time.

“If (an advisor) has clients who have excess cash or short-term bonds, if they can get their footing in the market and still have 100 per cent buffer, then there is a market for that product,” Dey said. Is.”

The innovator claims that the ETF structure offers several advantages over annuities, such as daily pricing and liquidity, the ability to buy and sell during the life of the product, no minimum purchase size, no withdrawal or surrender fees and greater tax efficiency.

However, not everyone was convinced of its merits.

Nate Geraci, president of The ETF Store, said: “If investors want to avoid market risk entirely, I would question whether they should participate in stocks in any format — a strategy offering relatively high fees and no dividend payments.” Leave it alone.” a financial advisor.

Brian Armour, director of passive strategy research for North America at Morningstar, compared this strategy to “owning Treasury bills, but betting on the coupons on the expectation that the yield will (rise) slightly over the resulting period.” The upside marginally beats the risk-free rate of return.”

Despite this, Armor thought it was an “interesting product,” but cautioned that the derivatives-based collar strategies on which the ETF relies to generate its payout structure “will work against you during irrational markets like 2008 or 2020.” May work. When put options were in high demand”.

In addition, he believed that cash management could be “difficult”, especially if the fund sees significant inflows during periods of market stress when put prices are more expensive.

“Personally, I would prefer to hold the two-year Treasury, which is as close to guaranteed as investors can get and currently yields 4.9 percent,” Armour said.

Geraci said this “whole possible return is meaningfully less than that upside cap”, when investors “can currently get yields of 5-6 per cent with minimal risk in short-term bond ETFs”.

“That said,” he added, “I believe these types of defined outcome ETFs will continue to take market share away from annuities and other traditional structured products, which can be even more expensive and complex, illiquid and non-volatile.” Not to mention zero credit risk.”

The world’s first exchange-traded fund to provide 100 per cent protection against losses is set to launch in the US on Tuesday.

Innovator US Equity Principal Protected ETF The increasingly popular “buffered” ETF will stretch the concept to its limits.

“This is something we’ve been looking at for a number of years,” said Graham Day, chief investment officer at Innovator Capital Management. “We’re starting to see a lot of interest in this type of product.”

To date, “defined outcome” funds have used derivatives to provide investors with some degree of downside protection — in exchange for giving up some potential gains — without attempting to protect against all losses, no matter what the market. Perform

For example, Innovator’s flagship Power Buffer range aims to protect investors against the first 15 per cent of market losses over the course of six months or a year, but not beyond that.

According to FactSet, defined outcome ETFs took off during last year’s turbulent markets, netting $10.9 billion in North America alone—the most developed market—up from a record $4.1 billion in 2021.

Despite better market conditions this year, they pulled in a further $4.6 billion in the first six months, even before BlackRock, the world’s largest asset manager, launched its first fund, potentially triggering a price war.

The Innovator US Equity Principal Protected ETF focuses on the S&P 500 Index and will use a series of put and call options to attempt to protect against any market losses over a two-year period. Further funds will be launched at six-monthly intervals.

However, investors may still be left out of pocket, given that the buffer is calculated before subtracting annual management fees, transaction fees and any “extraordinary” expenses incurred by the fund. The annual management fee is expected to be 79 basis points.

Market conditions, particularly volatility levels and prevailing interest rates, determine the level of the “cap”—the maximum return the ETF can generate over a two-year period.

Dey said he expects the first ETF to launch with a return of 15-18 per cent over a two-year period, or a range of 7.1-8.8 per cent on an annualized basis. Like other products offered by the innovator and its competitors, investors give up dividend income.

By comparison, since 2019, Innovator’s Monthly Series of S&P 500 Buffer ETF — which protects against the first 9 percent of losses — has averaged 17.4 percent over a 12-month period.

Its Power Buffer range — providing 15 percent downside protection — has an average upside cap of 11.9 percent, and its Ultra Buffer range — from -5 percent to -35 percent — protects against losses of 9.7 percent.

The innovator, which is the largest provider of defined outcome ETFs with $13.5 billion in assets, envisions the new fund as an alternative to the “antiquated” annuity market, as a way to “disrupt” the market for products offered by insurance companies. Presenting as

Sales of fixed-indexed annuities, which provide basic protection, rose 42 percent year-on-year in the US to $23.1 billion in the first quarter of the year, setting a record for the third consecutive quarter. life insurance market research association,

“Trillions of dollars have come into the economy (as a result of the COVID stimulus programs) but are sitting on the sidelines in cash, money market funds and bank deposits,” Dey said.

Yet historically, he argued, increasing exposure to equities, even with an upper limit, has generated returns greater than cash over time.

“If (an advisor) has clients who have excess cash or short-term bonds, if they can get their footing in the market and still have 100 per cent buffer, then there is a market for that product,” Dey said. Is.”

The innovator claims that the ETF structure offers several advantages over annuities, such as daily pricing and liquidity, the ability to buy and sell during the life of the product, no minimum purchase size, no withdrawal or surrender fees and greater tax efficiency.

However, not everyone was convinced of its merits.

Nate Geraci, president of The ETF Store, said: “If investors want to avoid market risk entirely, I would question whether they should participate in stocks in any format — a strategy offering relatively high fees and no dividend payments.” Leave it alone.” a financial advisor.

Brian Armour, director of passive strategy research for North America at Morningstar, compared this strategy to “owning Treasury bills, but betting on the coupons on the expectation that the yield will (rise) slightly over the resulting period.” The upside marginally beats the risk-free rate of return.”

Despite this, Armor thought it was an “interesting product,” but cautioned that the derivatives-based collar strategies on which the ETF relies to generate its payout structure “will work against you during irrational markets like 2008 or 2020.” May work. When put options were in high demand”.

In addition, he believed that cash management could be “difficult”, especially if the fund sees significant inflows during periods of market stress when put prices are more expensive.

“Personally, I would prefer to hold the two-year Treasury, which is as close to guaranteed as investors can get and currently yields 4.9 percent,” Armour said.

Geraci said this “whole possible return is meaningfully less than that upside cap”, when investors “can currently get yields of 5-6 per cent with minimal risk in short-term bond ETFs”.

“That said,” he added, “I believe these types of defined outcome ETFs will continue to take market share away from annuities and other traditional structured products, which can be even more expensive and complex, illiquid and non-volatile.” Not to mention zero credit risk.”