The Innovator Equity Defined Protection ETF: Downside Protection for Risk-Averse Investors
Introduction
The world of buffer funds is expanding rapidly, catering to investors seeking 100% downside protection. The Innovator Equity Defined Protection ETF (TJUL) is the latest addition to the firm’s suite of defined outcome funds. This particular fund aims to provide investors with full downside protection over a two-year period, but with capped upside participation of approximately 16.6%.
Popularity of Buffer Funds
Despite the recent stock market rally, buffer funds from Innovator and other issuers remain popular among investors in 2023. Money market funds have seen significant inflows this year, suggesting that many investors are still hesitant to take on risky investments.
The Alternative for Risk-Averse Investors
According to Tim Urbanowicz, head of research and strategy at Innovator, many advisors have clients who are too fearful to invest due to volatility and short-term drawdowns. To address this, the Innovator Equity Defined Protection ETF offers an alternative for such risk-averse clients to participate in the market.
The Strategy Behind the Fund
The fund utilizes a three-pronged options strategy, primarily using flex options. This strategy involves buying a call option on the SPDR S & P 500 ETF Trust (SPY) with a strike price below the current market level to provide upside participation. Additionally, Innovator purchases a put option for downside protection, while selling a call option with a strike price above the market levels to offset the price of the other two options.
Important Considerations
Investors need to pay attention to the remaining cap of the fund, which is relative to when the fund was set. Depending on the market conditions, there may be periods when the fund is more attractive than others. Additionally, due to the fund’s derivatives, it may not perfectly track the SPY when options are far from expiration. As a result, investors may need to wait until mid-2025 to capture their full upside.
Competition and Tax Efficiency
Other securities, such as 2-year U.S. Treasury notes, offer safe returns and compete with TJUL. Furthermore, the TJUL does not pay out dividends or coupons, making it more suitable for investors who do not need additional cash and want to limit their taxes.
Conclusion
The Innovator Equity Defined Protection ETF provides risk-averse investors with a unique opportunity to participate in the market while enjoying 100% downside protection. However, investors should carefully consider the fund’s terms and conditions, as well as the potential impact of market fluctuations.