Shield Your Investments with Resilient ETFs in Market Downturns

As market volatility increases, investors are increasingly seeking safe investment options. One strategy gaining traction is the use of resilient exchange-traded funds (ETFs) designed to shield investors during market downturns. Innovator Capital Management, based in Wheaton, Illinois, has established a solid reputation in this area, managing approximately $28 billion in assets.

Understanding Resilient ETFs

Resilient ETFs, often referred to as defined-outcome funds, apply a unique investment strategy to help investors manage market risks. They utilize options contracts to provide a safety net against significant losses.

Key Products

Among Innovator’s offerings, the U.S. Equity Power Buffer ETFs stand out. These funds protect investors from the first 15% of losses in the S&P 500 Index while providing upside potential capped at around 13% per year. With approximately $10 billion in assets under management, these products have become popular for cautious investors.

• PJAN: 15% buffer ETF with a 12% cap in 2025.
• PFEB: A similar ETF providing downside protection.
• PMAR: Ongoing monthly issuances tailored for investor needs.

The structure of these ETFs involves monthly purchases of put options at the S&P 500’s existing price and selling put options 15% below that price, which helps in managing risk and defining returns.

Performance Insights

The performance of these resilient ETFs, while secure, has been relatively underwhelming compared to broader market gains. For example, although PJAN gained 18% in 2023, the S&P 500 surged by 24.3%. Over a longer period since inception in 2019, the fund has an annualized return of 9.3%, trailing the S&P 500’s 15.6% growth rate.

However, the peace of mind offered by these funds may be worth the trade-off for risk-averse investors, particularly in a bubble-like market scenario.

Market Dynamics and Strategies

A dramatic increase in funds parked in money market accounts, totaling approximately $7.5 trillion, indicates a cautious approach among investors amid market uncertainties. Bruce Bond, Innovator’s CEO, likens investing in resilient ETFs to using bumpers in bowling—providing a level of protection that gives investors more security.

Innovator’s Historical Context

Bond’s journey in the ETF space began with First Trust in the 1990s, leading him and his colleague John Southard to establish PowerShares Capital Management. This innovative firm paved the way for various niche ETFs. Later, after acquiring Innovator Management, they introduced the industry’s first buffer ETFs in 2018, enabling a more structured approach to defined outcomes.

Industry Impact and Future Outlook

The emergence of buffer ETFs has sparked growth in the ETF industry, with a total of $75 billion now managed under similar strategies. Defined outcome ETFs alone have attracted over $10.8 billion in inflows this year, signaling strong investor interest.

Innovator has also debuted “dual directional” ETFs, designed to provide returns in declining markets, offering more comprehensive options for investors. Innovations like these keep the company at the forefront, even as potential for acquisition looms on the horizon, with estimates valuing the firm at a substantial figure.

In summary, resilient ETFs offer a strategic avenue for investors looking to protect their portfolios during market downturns. With Innovator Capital paving the way, cautious investors can find solutions that cater to their unique needs, ensuring their investments are shielded for the future.