Innovator Launches Groundbreaking 100% Protected ETF, Challenging Annuities

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The Innovator US Equity Principal Protected ETF, the world’s first exchange-traded fund (ETF) to provide 100% protection against losses, was recently introduced in the US by Innovator Capital Management. This ETF expands the “buffered” ETF concept to new limits, aiming to shield investors from market downturns while allowing them to participate in potential gains. Unlike traditional “defined outcome” funds that use derivatives to offer partial downside protection, this innovative ETF offers complete protection against losses regardless of market performance.

Innovator’s flagship Power Buffer range, which protects against the first 15% of market losses, has seen considerable success in the recent turbulent markets, attracting significant investments in North America. The Innovator US Equity Principal Protected ETF, focused on the S&P 500 index, utilizes a series of put and call options to safeguard against any market losses over a two-year period. Investors, however, should consider that the buffer is calculated before subtracting annual management fees, transaction fees, and any extraordinary expenses incurred by the fund, which are expected to be 79 basis points annually.

The “cap” on the maximum return the ETF can generate over the two-year period is influenced by market conditions, particularly volatility levels and prevailing interest rates. Innovator’s chief investment officer, Graham Day, expects the debut ETF to have a cap of 15-18% over two years, or 7.1-8.8% on an annualized basis. Although this ETF requires investors to forgo dividend income, it offers daily pricing and liquidity, no minimum purchase size, and no withdrawal or surrender charges, making it an attractive alternative to traditional annuities.

While Innovator claims several advantages of its ETF structure over annuities, not everyone is convinced of its merits. Some financial experts argue that investors seeking to avoid market risk entirely may question participating in an ETF with relatively high fees and no dividend payments. Bryan Armour, director of passive strategies research at Morningstar, compared the ETF’s strategy to owning Treasury bills, with returns narrowly exceeding the risk-free rate. He also cautioned about derivatives-based collar strategies, which the ETF relies on, as they may work against investors during irrational markets.

Despite differing opinions, the Innovator US Equity Principal Protected ETF is viewed as an interesting product that could disrupt the insurance market and compete with annuities. Sales of fixed-indexed annuities have been surging, indicating a growing demand for principal protection options. However, proponents of the ETF argue that historically, increasing exposure to equities, even with an upside cap, has generated returns that surpass those of cash over time. While potential challenges, such as cash management during periods of market stress, are highlighted, the defined outcome ETFs are expected to continue gaining market share from traditional annuities and other structured products due to their liquidity, greater tax efficiency, and potential for higher returns.


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