Earning income and protecting against losses at the same time is possible. Innovator ETFs are the pioneers behind defined outcome ETFs, and some of their best ETFs do exactly that.
Innovator ETFs is going after the massive insurance and structured note market. Prior to Innovator ETFs' launch of the defined outcome ETFs in 2017, investors who wanted income, protection and some stock market participation turned to insurance companies or issuers of structured notes. This came with hidden fees, issuer credit risk and hard-to-understand paperwork.
Innovator ETFs reinvented this process. Investors got some of the best ETFs that are transparent, efficient and low-cost. With $14.5 billion in total firm assets, the Wheaton, Illinois-firm offers today nearly 100 funds in three distinct categories. The categories are buffer, barrier and accelerated. It also provides bond and floor, stacker and traditional ETFs.
Best ETFs From Innovator
PowerShares Capital Management co-founders Bruce Bond, CEO, and John Southard, president, co-founded Innovator Capital Management in 2017. Both are leaders in the ETF industry. They're behind the development of smart beta and other strategies. PowerShares was later acquired by Invesco.
Graham Day, senior vice president and chief investment officer, joined Innovator in 2017. Prior to joining Innovator, Day was senior vice president and head of product and research at a startup ETF issuer and a senior strategist at Invesco PowerShares.
In an interview with Investor's Business Daily, Day shared the Innovator ETFs' advanced fund structures and strategies, as well as his economic outlook.
Best ETFs Take On Important Roles
IBD: What is the mission of Innovator ETFs?
Graham Day: Innovator is leading the defined outcome ETF revolution, through its defined outcome ETFs. They are the world's first and largest ETF family that seeks to provide defined exposures to broad markets that were formerly confined to the multi-trillion dollar annuity and structured product markets.
IBD: What are some of the strategies of your funds?
Day: If you just pull up the full list of products, it can seem overwhelming. But when you take a step back and you realize that really Innovator has buffer ETFs, accelerated ETFs, barrier ETFs and a few other, traditional ETFs — it's really not that overwhelming.
Buffer ETFs is our flagship product line. Buffer, barrier and accelerated all fall under the defined outcome ETF umbrella.
The buffers are solutions that give you upside to the market to a cap, with built-in buffers against loss. Those buffers are 9%, 15%, 30%. We just released a new product a few weeks ago that over a two-year period has a 100% buffer.
And then we have our income line up, the barrier ETFs. They give you known level of income over one year, with these built-in barriers against loss of 10%, 20%, 30% or 40%.
Our accelerated ETFs give you accelerated upside to the equity markets, to a cap, with only one-to-one downside. We view those products as a way to mitigate the risk of more muted returns.
Popular Best ETFs
IBD: What are your biggest and most popular ETFs currently? How was their performance?
Day: Our largest ETFs provide upside exposure to the S&P 500 ETF with 15% built-in buffers against loss over one-year outcome periods. We offer these and similar buffer ETFs to investors on the Nasdaq 100 ETF, Russell 2000 ETF, MSCI Emerging Markets ETF, MSCI EAFE ETF and 20+ Year Treasury Bond ETF.
For example, the Innovator U.S. Equity Power Buffer ETF-January provides upside to the S&P 500 ETF, to a cap, with a built-in 15% buffer against losses over each calendar year. In 2022 when the S&P 500 ETF dropped 19.48%, PJAN lost 5.22% net of all expenses with 40% less volatility. For calendar year 2023, PJAN has an upside cap of 18.84% with a 15% buffer.
IBD: Which ETFs saw the biggest in and outflows in the past 12 months?
Day: The Innovator U.S. Equity Power Buffer ETF-July is our largest ETF and has taken in $475 million in flows over the last year. The Innovator U.S. Equity Ultra Buffer ETF-January has seen outflows of $218 million over the last year.
Making Adjustments To ETFs
IBD: How has your firm adapted to the changing macroeconomic environment as well as customer needs?
Day: We remain committed to providing advisors with an evolving set of tools to manage market risks through defined outcome ETFs. The key difference with defined outcome ETFs is investors can know actual levels of upside potential and risk management prior to investing. This can help advisors better allocate client portfolios, plan for the future and manage market risks. After 2022 where both stocks and bonds were highly negative, investors realized the value of having built-in risk management through defined outcome ETFs, and specifically our buffer ETFs.
IBD: How do you decide to launch an ETF?
Day: We are focused on bringing ETFs to market that provide access to payoffs or exposures previously available only in more expensive and less efficient structures. The ability to offer these exposures to investors through the ETF wrapper provides investors with tremendous benefits. For example, for decades there has always been strong demand for products that provide upside to equity markets but with built-in risk management. Before Buffer ETFs these exposures were limited to the structured note and insurance worlds. What we have found is buffer ETFs are more cost-effective, tax-efficient, liquid and do not carry surrender charges or credit risk found in these other wrappers.
Who's Buying The Best ETFs?
IBD: Who are the primary clients and buyers of the ETFs?
Day: Our primary clients are RIAs (registered investment advisors) and financial advisors. We are seeing growing interest amongst institutional investors as well who have found the benefit of accessing these payoffs via the ETF wrapper to be more cost effective than recreating the exposures themselves.
IBD: What does the future look like from an economic and market perspective?
Day: There is a lot of uncertainty in the markets. We think interest rates are likely to be higher for longer as the Fed looks to decisively get inflation back to its target level of 2%. Historically this takes years to accomplish, not months. The longer short-term rates remain elevated the higher the likelihood long-term rates may also rise.
IBD: Do you have a pipeline of more ETFs?
Day: We pioneered the first defined outcome ETF in 2018 and remain committed to being the leaders in the defined outcome ETF arena moving forward.
