The FLEX Options allow Innovator to pick a specific expiration day and strike price. Several layers of options are used: one set to track the market; one set to provide a buffer and a third layer creates a cap. By selling the upside, the third set of options helps pay for the other layers. “That’s why we’re able to tell people this is the range of outcomes you can expect,” Bond says.
He adds that the funds are considered actively managed from a registration standpoint, but are based on a CBOE index. “We set what the options will be at the beginning and we buy the same options all the way through. So there’s really no subjective decisions being made throughout the year,” Bond says.
Todd Rosenbluth, director of ETF and mutual fund research at CFRA, says these ETFs work as advertised. “We’ve had a couple periods of volatility in the past year where they’ve had a chance to demonstrate the value-add they provide. I think they delivered what you would expect them to have delivered on,” he says, noting data show these ETFs fell considerably less than the broader market.
He says the Innovator ETFs are an alternative way to mitigate risk, versus other popular ETFs like low-volatility funds. Rosenbluth notes the ETFs debuted when stocks were rising, “so it was easy to dismiss the validity and value of these approaches, but they had their chance to deliver in the fourth quarter.”
The structure of these ETFs dictates that they miss some of the upside when the market rallies, but they also miss some of the downside, “which is maybe what people are more interested in,” Rosenbluth says.
Next week, Innovator will expand its defined outcome approach to overseas equities with the rollout of the July Series of the Innovator MSCI Emerging Markets Power Buffer ETF (EJUL) and Innovator MSCI EAFE Power Buffer ETF (IJUL), which will go into effect July 1 for the next one-year outcome period. These two products both will offer a downside buffer of 15 percent, along with their respective pre-set upside caps. That launch also will include the three buffer versions of the July Series of the Innovator S&P 500 ETFs.