The Innovator defined return ETF series has proved very popular over a number of years and still form the most comprehensive range of defined return ETFs in the market. The original format was the Buffered series which started trading in 2018. Other payoffs have been created since, such as income, dual directional and more recently the autocall. These different shapes mimic the variety and development of the structured product market and the autocall version has quickly established itself with high amount invested. However the buffered series remains the simplest core proposition and are the equivalent of the capped and buffered tracker structured note or call and put option hedging by an investor.

The Innovator Range

The first three Innovator buffered ETFs in 2018 were the S&P 500 Buffer ETF – July (ticker: BJUL ) with a 9% buffer, S&P 500 Power Buffer ETF – July (PJUL ) with a 15% buffer and S&P 500 Ultra Buffer ETF – July (UJUL) with the first 5% of losses suffered but with a 35% deep buffer. All of these ETFs operate on a 12 month cycle with returns at each annual reset governed directly by SPY performance. This is how the defined ETF concept works, precise contractual returns from one reset date to the next, with mark to market fluctuations in between resets driven by SPY levels, volatility and other parameters that also affect structured product pricing.

The naming convention adopted by Innovator reflects the type of buffer ETF (B: buffer, P: Power and U: Ultra). Monthly series for each were created in the following months after the initial July series with a consistent naming convention. This creates a family of 36 ETFs which form the core of their defined ETF series and which can be combined by investors to spread calendar risk and to tailor risk levels.

Buffer, Power and Ultra

The current AUM for the three series are approximately USD 273m for BJUL, USD 998m for PJUL and USD 142m for UJUL. The power series is the most popular of the three since it has a deep enough buffer (15%) to absorb the typical short dated bear markets. The standard buffer range only covers up to 9% and this significant difference is enough to explain why the power series has proven the mainstream choice. The buffer range will start to lose value at the annual reset date whereas the power range is covered up to another 6% of fall. Not only does this help at the annual reset dates but it means that the traded values during the year are potentially significantly better if the SPY trades down.

The Ultra series does not cover the first 5% of losses but has a buffer of a further 30%. This very deep protection is accordingly very costly in terms of the cap that is set and the potential upside given up. This explains why it has a relatively low AUM, it will only appeal to very risk averse investors and even they may be tempted by simpler less expensive solutions. All series currently have an annual fee of 0.79% per annum. This covers cost of dealing as well as the fee directly going to the ETF issuer.

Performance Since Launch

The performance of the Innovator ETFs since their launch in 2018 paints an interesting picture.

Figure 1 provides a detailed analysis of the SPY total return and the first three Innovator ETFs. All three of these ETFs are collared strategies on the SPY and therefore we would expect lower volatility than the SPY itself and a beta (average market exposure) somewhere between zero and 100%. This is confirmed in the table which has the ETFs reducing in volatility according to their strategy, decreasing in the order Buffer, Power and Ultra. The average beta to the market (as defined by the SPY index) is 62% for the Buffer series and less than 50% for the other two. The Sharpe ratios of the Buffer and Power series almost match the SPY, but the cost of the very deep buffer appears to have adversely affected the Ultra series. The buffered ETFs not only exhibit reduced volatility but also lower maximum drawdowns, and lower maximum rolling drawdowns, metrics which better reflect the likely size of losses for investors.

The total return of all three buffer series is lower than the SPY because of the strong market growth that the US Index ETF has seen over the timeframe, however the Sharpe ratios of the Buffer and Power series are very close to that of the SPY. Of the eight annual periods since inception of the buffered ETFs the cap has been hit on three occasions by both the buffer and power series, and the buffer has helped on one occasion (2021-2022). The Ultra series got capped on a further occasion but the buffer was less useful because of the 5% excess. This is shown below:

It is interesting that the Buffer and Power series are able to almost match the Sharpe Ratio of the SPY ETF despite the fact that the cap was hit three times but the buffer only helped on one occasion. This implies that even after fees the buffered ETFs do a very efficient job in reducing volatility and dampening losses, this contributes to controlling volatility even for periods where the buffer was not needed. Despite the strong Sharpe ratios, and the obvious connection between the buffered series and the parent ETF it should be remembered that these ETFs are not intended as direct market replacements but as a controlled risk solution. They sit partway between Equity and Cash with much of the properties of structured products but in an ETF wrapper with all the benefits of liquidity and dealing that it brings.

This article was generated from data coming from the SRP Greeks application, a service which provides aggregate Greeks data on important underlyings in structured product markets. The product set is taken from the SRP database and all calculations and analytics are powered by FVC. For more information contact www.structuredretailproducts.com.