Everybody wants certainty in uncertain times. So when the you-know-what hit the fan during the pandemic-fueled selloff in U.S. equities, investors yearned for something resembling a security blanket.

So-called defined outcome, target outcome or “buffer” exchange-traded funds were created for such times. These actively managed products, which Innovator Capital Management LLC debuted in 2018, are designed to provide preset upside and downside return potential benchmarked to a specific index—typically the S&P 500 Price Return Index, though Innovator has since introduced products tied to four other major indexes.

These funds employ an options-based strategy built around a defined outcome period of a year, and they hold a basket of FLEX Options with varying strike prices (the price where the option holder may buy or sell the security by a specified expiration date) and the same expiration date of roughly one year. FLEX Options are customizable exchange-traded option contracts guaranteed for settlement by the Options Clearing Corporation.

Innovator says that layering FLEX Options with varying strike prices produces a fund’s intended downside buffer and upside cap to the performance of a stated index. The actual upside cap for each fund is set at the beginning of the outcome period and depends on market conditions at that time.

Innovator now has 48 defined outcome ETFs, with total assets under management exceeding $3 billion. Funds that offer exposure to the S&P 500 come in a monthly series (there’s a separate series for each month), and they automatically reset at the end of each outcome period, roughly annually. Innovator also offers buffer ETFs with exposure to the MSCI EAFE, MSCI Emerging Markets, Nasdaq-100 or Russell 2000 indexes, and these are issued quarterly. The S&P 500 and Russell 2000-based funds have net expense ratios of 0.79%, the MSCI EAFE funds charge 0.85%, and the MSCI Emerging Markets funds cost 0.89%.

And they come in three different buffer levels: There’s a 9% buffer for the first 9% down in the market; a 15% buffer that protects against the downside from zero to 15%; and a 30% buffer that starts at negative 5% and goes down to negative 35%.

As mentioned, the upside caps are set at the beginning of a fund’s outcome period. With Innovator’s July series S&P 500 funds, for example, the upside cap has a range that tops out at nearly 18% for the 9% buffer fund. It could be as high as 12.6% for the 15% buffer fund, and it maxes out at 8.6% for the 30% buffer product.

Innovator’s success in this space has spawned a growing list of competitors offering products with specified downside protection and upside caps over one-year time frames. First Trust launched its first buffer-style ETFs late last year, and it now has 10 funds in what it calls its target outcome category. All employ FLEX Options tied to the SPDR S&P 500 ETF Trust (SPY), and they have expense ratios of 0.85%.

Allianz recently rolled out four ETFs (two in a June series and two in a July series). They’re designed to match the returns of the S&P 500 Price Return Index up to a stated cap, and they provide a downside buffer against a 10% loss or a 20% loss against the index, depending on the fund. These products charge 0.74%.

Another new player in this space is the TrueShares Structured Outcome ETF Series from TrueMark Investments. Its first product (with an outcome period starting in July) launched on June 30 and employs FLEX Options on the S&P 500 Price Index or an ETF that tracks that index. Other monthly series funds are in the queue, and they aim to provide an 8% to 12% downside buffer against losses in the S&P 500. But the TrueShares products offer a new twist in that they come with uncapped upside participation. These funds have a 0.79% expense ratio.

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