January 2024
What inspired you and John Southard to start Innovator ETFs?
We started Innovator because we believed there were limited investments in the marketplace that provided quality equity risk management to investors
What was your goal in bringing Buffer ETFs to the marketplace?
Our goal was to open the minds of investors to understand that there were superior ways of thinking about exposure and participation in the equity markets.
What are the primary advantages of owning Buffer ETFs?
The primary advantage of owning Buffer ETFs is being able to maintain exposure to the market’s upside potential, with a known level of built-in protection on the downside.
Obviously, Innovator has already had tremendous success, but were there any particular early hurdles you faced?
Our initial hurdles were getting the products approved by the SEC. It took more than a year because there had never been another defined outcome ETF introduced. We always thought if we could launch a product that provided compelling payoffs, investors would engage with those ETFs. One of our biggest hurdles was educating investors on how they work and why they make sense as part of a portfolio.
You’ve raised billions mostly through Registered Investment Advisors. Have there been any particular Buffer ETFs or strategies that have appealed mostly to RIAs and their clients?
Initially the 12-month Buffers on the S&P 500 were the main attraction for the RIA community. Since then, the interest has broadened out into other markets and profiles, including quarterly outcomes and accelerated exposures.
For moderate-risk investors already in retirement or nearing retirement, which of your offerings might be the most appropriate for them?
One of our most successful offerings is the 15% buffer strategy. This seems to be the level of protection that has had the greatest appeal to investors in or nearing retirement. Our 20% quarterly buffer strategy is another one that has seen steady inflows as investors have used it for a defensive allocation that doesn’t carry any interest-rate risk or credit risk.
Are some of your Buffer ETFs more appropriate during bull or bear markets, or sideways, range-bound markets?
The beauty of Buffer strategies is that investors don’t have to worry about whether the market goes up or down. If the market goes up, a buffer strategy will participate to a predetermined maximum level, and if it goes down, the strategy offers the chosen level of protection. The smaller buffers that have higher caps tend to perform better in positive markets, while the bigger buffers tend to perform better during bear markets.
What strategies are typically recommended by advisors if we are deep in a bear market? And, what would be a recommended strategy if we are at very lofty stock-market valuations or even potentially in a euphoric bubble?
Whether we are in a bull market or a bear market, the preferred buffer level typically boils down to the risk tolerance of the investor and where we are in the market cycle. For example, after an extended bull market, valuations are often stretched. In that kind of scenario, investors begin to believe that the market could reverse course, causing them to get out of stocks, or at the very least to stop adding exposure. This approach is beneficial if the market falls, but detrimental if the market continues to climb. We see greater demand for buffer strategies in circumstances like this; if the market does go down, the buffers provide built-in protection, but if it doesn’t, the strategy will participate in the continued positive performance.
Are most investors and advisors using your ETFs in a passive manner or are they actively managing portfolios and looking for opportunities intra-outcome period?
A large majority of investors are using them to replace equity exposures over a full outcome period, but we do have significant interest from investors who are looking for unique intra-period opportunities.
Buffer ETFs can serve as a core holding for investors. Are advisors using them as core holdings now or as a slice of their overall asset allocation for clients?
We have seen both approaches used. Many initially exchanged their hedged positions which hadn’t performed as anticipated for Buffer ETFs and then decided to replace larger portions of their equity exposures or even fixed income exposures with buffers.
If Buffer ETFs can serve as a core holding, why not allocate nearly an entire portfolio in Buffer ETFs?
Over time progressive advisors are realizing that this will likely be the way to go in the future. Some have begun to transform their business already. The poor performance of 60/40 portfolios over the last few years has made investors and advisors realize that bonds aren’t immune from downturns and that relying on historical correlations can be a big mistake.
Innovator recently launched 100% downside protection Buffer ETFs. Are there any Innovator offerings that you find particularly attractive in the current environment?
I think that some of the quarterly and accelerated strategies will be interesting as we move forward. Many of the quarterly strategies remove significant risk and volatility from equity participation and the accelerated strategies have the ability to improve performance during lower-return markets, which we could see over the next several years.
Billions have flowed into Defined Outcome ETFs in the past 5 years. Where is this segment of the ETF marketplace headed in the coming years? How will Innovator maintain its advantage as the leader in the field?
Innovator is the market leader and the driving force behind the Defined Outcome ETF category and we plan to continue to innovate in the space as it continues to expand. I believe that the expansion will continue at a fast pace into the foreseeable future as investors realize through different market cycles that most investment products that they hold in their portfolios do not deliver on their performance promises. Conversely, with Defined Outcome ETFs, investors can know before investing exactly what their investment outcome will be for any given market scenario. In a chaotic world, investors love predictability, and that’s exactly what Defined Outcome ETFs offer.
Thank you, Bruce.