December 8, 2023

The pioneer of the world’s first “cushion ETF” – an exchange-traded fund designed to limit losses during a market sell-off – has launched a new product it says offers investors comprehensive downside protection.

Investors in the $7.5 trillion ETF market can now put money into the Innovator Equity Defined Protection ETF, which started trading on Tuesday under the ticker TJUL. The offering comes from Innovator Capital Management, which launched the first so-called buffer ETF, sometimes called a fixed-result fund, in 2018.

As the name implies, buffer funds provide cushioned equity exposure by limiting an investor’s downside risk while limiting the upside potential. Since their launch, the products have attracted industry heavyweights such as BlackRock, the world’s largest ETF issuer, and have attracted about $5 billion in inflows so far this year, according to Bloomberg Intelligence data.

According to Bloomberg Intelligence, buffer funds can protect investors from widespread losses when their respective metrics fall, though the most popular ones tend to fall within the 15% buffer range. However, Innovator says its TJUL fund, which will track S&P 500 returns up to a capped percentage over two years, will be the first of its kind to protect against 100% equity losses. The potential earnings cap on TJUL net of fees is estimated to be approximately 15%.

Specifically, the fund invests at least 80% of its net assets in options on the $423 billion SPDR S&P 500 ETF Trust, according to the fund’s prospectus. TJUL can buy and sell a combination of calls and puts to mitigate market volatility.

The prospectus shows that the results set by the fund can only be achieved by investors who continue to hold TJUL shares from the first day of the “results period” (July 18) to the end of the two-year period (ie June 30, 2025). Thereafter, a new two-year fruition period will begin.

Innovator believes that significant cash flows to certain segments of the insurance market, such as fixed indexed annuities, point to a need for the type of exposure TJUL provides. The market is rarely challenged, said Graham Day, chief investment officer at Innovator.

“If we look at the insurance and structured note space, we see that there’s a lot more demand for products that give you some equity upside but also 100% downside protection,” Day said. “That’s what we’re going after with this definition-protected ETF — for the first time ever, giving investors access to the stock market but with a 100% cushion built into the product.”

Bloomberg Intelligence analyst Athanasios Psarofagis said buffer products made it easier for investors looking to limit downside risk to get into stocks “without going to insurance companies and at a cheaper price”. “These strategies make a lot of sense this year because there’s not a strong conviction in the market yet, so it’s a good way to get involved but with some protection rather than going all out.”

Innovator charges an annual fee of 0.79% on its TJUL ETF.

It offers more than 50 buffer funds that collectively have drawn down more than $12 billion in assets since 2018, according to the firm. The largest investment vehicles include the Innovator S&P 500 Power Buffer ETF, with about $687 million in assets, and the Innovator S&P 500 Power Buffer ETF, with about $834 million in assets.

The ETFs are up about 11% and 15% so far this year, compared with a gain of nearly 18% for the S&P 500 .

– With assistance from Katie Grayfield and James Seifert.