Innovator Capital Management has unveiled the Innovator Premium Income Barrier ETF suite, an innovative suite of defined outcome ETFs that combine fixed rates of high income with protective barriers against a decline in the S&P 500.
Bruce Bond, CEO of Innovator Capital Management.
Defined outcome investing refers to an investment strategy that shapes the potential outcomes of a reference asset or index to fit specific protection and return levels over a pre-determined time period, allowing for a more controlled investment experience.
One of the most popular defined outcome investment strategies involves protecting against a set-level decline in the S&P 500 over an outcome period, usually one year. In exchange for this protection, investors’ upside potential is capped if the S&P 500 rises above a certain threshold.
The new Income Barrier ETFs similarly contain a set level of downside protection on the S&P 500 over a one-year time horizon. If the level of downside protection is breached, investors take on the full downside of the S&P 500.
However, investors do not participate in the S&P 500’s upside but rather receive a fixed level of ‘income’ regardless of the index’s performance. The amount of income received is inversely related to the level of downside protection.
Listed on Cboe BZX Exchange, the Premium Income Barrier ETF suite has debuted with an initial four funds offering downside protection levels of -10%, -20%, -30%, and -40% on the S&P 500 over a one-year outcome period.
Each ETF obtains its defined outcome profile by investing in US Treasuries and customizable option contracts referenced to the S&P 500.
The Premium Income Barrier ETFs have a perpetual structure meaning that the funds’ level of downside protection is refreshed at the end of each outcome period alongside new levels of income based on market conditions at that time.
Based on the initial outcome period which ends on 31 March 2024, the fixed levels of income offered by the four ETFs are as follows:
Innovator Premium Income 10 Barrier ETF (APRD US); 10.11%
Innovator Premium Income 20 Barrier ETF (APRH US); 8.73%
Innovator Premium Income 30 Barrier ETF (APRJ US); 7.32%
Innovator Premium Income 40 Barrier ETF (APRQ US); 6.30%
Investors should note that, as the ETFs have been tailored for their specific outcome periods, the funds’ interim returns during the outcome period may behave differently compared to their defined outcome profiles. This may be due to the time value of the underlying options as well as how much the S&P 500 has risen or fallen between the start of the outcome period and when an investor buys into the fund.
While these dynamics can present a challenge, Innovator provides full daily disclosure for its ETFs including remaining income to be paid during the outcome period, remaining protection until the barrier is breached, and remaining days in the outcome period.
Innovator also intends to build out its suite of Premium Income Barrier ETFs by listing similar funds with one-year outcome periods beginning in July, October, and January, providing investors with more opportunities to pursue high income across different market environments.
Bruce Bond, CEO of Innovator Capital Management, said: “We’ve experienced a steady drumbeat of advisor interest for income-focused defined outcome ETFs, and we’re excited to be able to meet that demand. The Barrier ETFs are unique in that they are designed to offer meaningful positive return potential in up or down markets, which we believe creates a compelling portfolio diversification benefit.
“Unlike traditional covered call strategies that generate a fluctuating level of income and seek no built-in downside risk management, the Barrier ETFs seek to offer a pre-determined fixed level of income over the outcome period, along with a protective barrier against losses.”
Graham Day, CIO of Innovator Capital Management, added: “The traditional income sleeve of a portfolio often has a large allocation to bonds and carries significant exposure to both interest rate risk and corporate credit risk. The Barrier ETFs hold option positions on the large-cap US equity market and have one-year outcome periods, leaving them with no exposure to bank credit risk and very low duration.”