The table compares the potential outcome parameters for Innovator’s U.S. Equity Power Buffer series (15% protection) for the July, August, and September series (PJUL, PAUG and PSEP). The reference asset is the S&P 500 (SPY).

When comparing these three Buffer ETFs, it’s of primary concern to first determine how much downside protection remains from the original 15% protection that was available on the most recent reset date. You can see that if the SPY’s return is break even (“Asset Flat”), for the remainder of the outcome period, PAUG will lose 1.35%, PSEP will decline 0.99% and PJUL will lose 0.48%.

Now, look at the column titled “Asset -15%.” This column shows you how much you would lose if SPY (“Asset”) declines 15% from the date of your purchase on November 22, 2023 to the end of the outcome period. PAUG offers the most protection if SPY were to decline 15% at the end of the outcome period – you would only lose 1.63%. PJUL would lose 3.31% if SPY was down 15% from the current price level at the end of the outcome period, and PSEP would decline 2.27%.

Note, obviously with a 15% buffer, you don’t have protection beyond the first 15% loss, so if the reference asset lost 20%, for example, during the remainder of the outcome period, PAUG would lose 6.55%, PSEP would drop 6.14%, and PJUL would decline 5.88%.

On the positive side of the ledger, to the right of the column titled “Asset Flat,” you can see how the Buffer ETFs will perform if the reference asset appreciates from November 22 to the end of the outcome period. For example, if SPY is up 10%, PAUG would gain 8.15%, PSEP 8.91%, and PJUL 9.47%. The upside performance for all three ETFs is capped around the 15% return level of the reference asset. If SPY is up 15% during the remaining outcome period, PAUG would gain 13.06%, PSEP 12.36%, and PJUL 10.5%.

Any gains of the reference asset beyond 15% are effectively forfeited (upside is capped during the outcome period). For example, SPY could jump 30%, but your return would be capped out at 13.66% for PAUG. This is the potential price you pay for having downside protection.

The columns in the table provide more important information to consider prior to making an intra-outcome Buffer ETF purchase. Let’s define each column.

“Ticker” refers to the trading symbol of the Buffer ETF.

“Reference Asset” refers to the underlying asset the Buffer ETF will track during the outcome period.

“ETF Return” shows the percentage the Buffer ETF has made or lost since the most recent reset date.

“Asset Return” shows the percentage return of the underlying asset (SPY) since the most recent reset date.

“Return Difference” is the percentage difference in performance between the underlying asset and the Buffer ETF.

“Asset Return to Cap” refers to how much the underlying asset (SPY) would have to appreciate to reach the upside cap.

“Remaining Cap” refers to the maximum amount of percentage gain the Buffer ETF owner could make in the remaining outcome period, before you reach the upside cap.

“Downside Before Buffer” refers to how much an investor could lose (percentage loss), from the current price level of the Buffer ETF, before the Buffer ETF’s “protection” kicks in.

Remember, if you own a Buffer ETF that is showing a profit since the prior reset date, or you are considering buying a Buffer ETF that already shows a gain in the new outcome period, that gain is unprotected. If the Buffer ETF subsequently declines, you could lose money before the buffer actually helps you (“Downside Before Buffer”). For example, if the Buffer ETFs in the table decline during the remainder of the outcome period, you could lose 1.36% in PAUG, 2.29% in PSEP, and 3.33% in PJUL before the buffer starts to protect against losses.

“Remaining Days” is the number of days remaining before the next reset date.

Summary

When comparing the potential outcome parameters for the three Innovator U.S. Equity Power Buffer ETFs, PAUG, PSEP, and PJUL on November 22, 2023, PAUG is probably the most attractive. It has 252 days remaining in the outcome period, which is much less than a newly reset Buffer that has 365 days remaining to the next reset date. Its upside cap (13.66%) is the highest of the three Buffer ETFs, and it also provides the most protection if the reference asset were to decline by 15%. It would only lose 1.63% while the other two would decline 2.27% and 3.31%, respectively. Overall, PAUG offers an attractive risk-reward profile with a relatively short outcome period, which makes it a potentially compelling intra-outcome purchase.

The table shows the potential outcome parameters for PNOV. It offered a very compelling intra-outcome opportunity. PNOV had already gained 12.04% from the most recent reset date – that’s a pretty stellar return over an approximate 7-month period. However, all the gains were unrealized and at risk for the remainder of the outcome period. Obviously, we know that predicting stock market performance over a short time horizon is nearly impossible, so there is a real risk of losing these unrealized profits by the end of the outcome period. What we do know is, if we had purchased PNOV on the prior reset date (October 31, 2022), we had a very attractive unrealized gain that was at risk. Unrealized gains can quickly turn into losses in volatile markets.

A sale of PNOV on June 16 would have protected the 12.04% profit and removed the uncertainty of remaining invested for the balance of the outcome period.

Another reason to have considered a sale of PNOV was the fact that PNOV only offered another 7.03% upside potential (“Remaining Cap”). So, the investor knew the profit potential would be capped at 7.03% over the remaining 137 days. That’s still an attractive return, but not as high as the upside cap of PJUL on its upcoming reset date. By selling PNOV and rotating into PJUL (resets in two weeks on June 30) the investor could lock in profits and create fresh downside protection with a new upside cap (14.28%) over the next 12-month outcome period.

A more conservative strategy would have been to sell PNOV and park the proceeds in Treasury bills for the remainder of the outcome period.

PNOV to Cash, then Back to PNOV

With the benefit of hindsight, a move from PNOV to cash on June 16, and then back to PNOV on October 31, 2023 (the next reset date), would have significantly improved the cumulative percentage gain from October 31, 2022 to December 31, 2023.

In the hypothetical example highlighted in the graph, the investor chose to sell PNOV on June 16 and wait to repurchase it on its next reset date on October 31. It proved to be a highly profitable trade. By repurchasing PNOV on October 31, the investor got a fresh protective buffer and new upside cap.

The graph shows a nice visual of how a move from PNOV to cash on June 16, and then back to PNOV on October 31, would have performed relative to the reference asset and compared to a passive PNOV buy-and-hold strategy, by the end of 2023.

If an investor had held PNOV from its prior reset date to the end of 2023, the cumulative return would have been 14.77%. If the investor had instead sold PNOV on June 16 and repurchased it on October 31, there would have been a significant increase in performance. The total cumulative return to the end of 2023 would have been 21.45%. Note, as is clearly shown in the graph, both Buffer ETF strategies lagged the performance of the S&P 500. The buy-and-hold approach of PNOV showed a cumulative return of 14.77%, and the active strategy (sell and repurchase PNOV on the next reset date) showed a return of 21.45%, but the S&P 500 returned 25.66%. Still, a buy-and-hold PNOV strategy would have performed nicely during the outcome period, and a protective sale of PNOV on June 16 and subsequent repurchase on October 31, would have been even more profitable. The S&P 500 will always at least slightly outperform Buffer ETFs in a rising market (fee drag), but an investment in the S&P 500 offers no downside protection whatsoever.

Obviously, in taxable accounts, an investor must consider the potential tax hit for realizing a short-term taxable gain compared to passively holding PNOV and potentially losing profits during the remainder of the outcome period. Intra-outcome active strategies are much easier to implement in tax-deferred accounts (no IRS reporting of capital gains).

Cumulative Returns: 10/31/2022 – 12/31/2023

PJAN to PSEP Step-Up Strategy

The hypothetical graph shows an example of how an investor could have utilized a step-up strategy in 2021. Let’s assume an investor purchased PJAN on the reset date on December 31, 2020. During the subsequent 12-month outcome period, the investor saw an opportunity to take profits on August 31, 2021 and simultaneously purchased PSEP. The investor locked in profits with the sale of PJAN and then bought PSEP on the reset date, thus creating a fresh 15% downside buffer and new upside cap. The improved performance through the end of the year was minimal, but the real advantage was locking in profits early (four months before the reset date) and receiving a new buffer and higher upside cap by simultaneously swapping into PSEP.

It’s important to stress again that during the intra-outcome period (before the next reset date) unrealized gains in Buffer ETF positions are unprotected. The initial investment at the start of the outcome period has protection in place (the amount of protection will vary depending on the Buffer series purchased), but any gains that show in Buffer ETFs prior to the next reset date are at risk. For example, a Buffer ETF could show a gain of 10% during the first eight months of the outcome period, but if the reference asset tumbles the last four months of the outcome period, the 10% unrealized profit could evaporate. So again, at times it can be prudent to capture gains before the end of the outcome period.

Bottom line, by paying attention to the ever-changing outcome parameters of Buffer ETFs, an investor will undoubtedly find some opportunities to lock in profits and potentially improve performance too.

Cumulative Returns: 12/31/2020 – 12/31/2021

The reference asset (SPY) has skyrocketed in a few short months. SPY is up 18.06% since the last reset date. PNOV has lagged SPY by a significant amount (-9.68%), but is still showing a healthy profit of 8.38% in the three months since the last reset date. Should you consider a sale of PNOV to lock in profits? The unrealized gains are not protected during the remainder of the outcome period (272 days), so if the reference asset declines and remains down by a significant amount when the next reset date comes around, you could lose your profits. So, what factors should be considered to decide if a sale of PNOV makes sense?

Let’s answer each of the questions posed at the start of this section to determine what could be the right course of action:

1. What are the current potential outcome parameters for the Buffer ETF you own?

The current potential outcome parameters make a sale of PNOV difficult. Sure, you have a nice unrealized profit of 8.38% in a very short period, but the fact that PNOV has lagged the return of SPY by 9.68%, makes a sale problematic. Why? Well, there are potential gains you could forgo by selling now. If SPY goes nowhere (“Asset Flat”), and even if SPY declines by no more than 5%, you’d still make more money in the position by the end of the outcome period. Look at the column titled “Asset -5%.” You can see that if SPY declines by 5%, you will still make another 2.67%. The prices of the option contracts within the Buffer ETF have caused the NAV of the ETF to lag SPY by a significant amount early in the outcome period (not atypical in a fast-rising market). However, PNOV should eventually “catch up” somewhat as the ETF nears the end of the outcome period (and perhaps sooner) due to time-value erosion as the options near expiration.

You should also consider that even if SPY is flat at the end of the outcome period, PNOV will still make another 5.97%. That’s not a bad return for a market that goes nowhere from its current level to the next reset date. Note, the upside for the ETF is capped at 5.97% from the current level of SPY. So, if SPY gains more, you will not participate in those gains – you’ll be capped out at 5.97% from the current level.

My opinion is the potential outcome parameters make it difficult to sell PNOV and lock in the 8.38% profit. SPY could be flat from its current level to the end of the outcome period, and you would still make nearly 6% more if you hold your position. And, if SPY declines 5% from the current level, you’ll still make another 2.67%.

2. What is your risk tolerance? Are you a conservative, moderate or aggressive investor?

If you have a very low tolerance for risk, you may be inclined to take your 8.38% profit. The column titled “Downside Before Buffer” indicates that if PNOV has a significant decline at the end of the outcome period, you could lose your profits. PNOV could lose 8.53% before the buffer provides protection. A conservative investor might not want to risk losing the unrealized gains in PNOV. The more risk averse you are, the more inclined you might be to take your profits.

3. Why did you buy PNOV? What were your investment objectives?

The reason for your purchase of PNOV could influence whether or not you make a sale of shares intra-outcome. Did you buy PNOV mainly for the 15% downside protection or were you more focused on the nearly 15% upside potential over the outcome period? At the outset, would you have been happy to capture a gain of 8.38% in just three months? 8.38% in three months is an annualized return of over 30%. So, if you are content with a three-month return of 8.38%, and you are more focused on not losing your unrealized gains than trying to capture the additional 5.97% maximum return, then you may decide to sell now.

4. What are the tax consequences if you make an intra-outcome sale? Is the position held in a tax-deferred or a taxable account?

If you hold PNOV in a taxable account and the position shows a short-term gain, you’ll likely want to hold it to avoid paying taxes (ordinary income tax on a short-term capital gain). If you hold to the next reset date and get to long-term tax status (more than one year), this could result in substantial tax savings, assuming you eventually sell at some point after reaching long-term capital gain status. Of course, by holding the position you know the unrealized gains are at risk until the next reset date, but you also know that you have a chance to make another 5.97% and avoid a short-term capital gain tax hit. I’d lean towards holding the position to at least get to long-term tax status. Obviously, if you hold PNOV in a tax-deferred account this topic is moot.

5. What is your opinion of the short-term direction of the reference asset (SPY)? Do you fear a correction (10% drawdown) or deeper decline?

Your opinion as to the direction of the reference asset in the coming months could influence your decision to hold or sell PNOV. If you fear a significant decline, for whatever reasons, you may be inclined to sell and lock in your profits now. Yes, you could owe taxes on your gain, but if you’re worried about a decline of 8.53% or more in PNOV (“Downside Before Buffer”), and it happens, then your profits will erode and perhaps turn into unrealized losses, and you’ll likely be disappointed you didn’t sell earlier. If, on the other hand, you expect SPY to be relatively stable (range-bound sideways action) or even move higher in the coming months, then you’ll likely want to hold your position and hopefully capture an additional 5.97% gain over the remainder of the outcome period.

There are many factors to consider in this hypothetical example of PNOV. You’ve had the good fortune to have made a very nice profit in a short period of time, but the fact that PNOV has lagged the reference asset (SPY) by a significant amount makes a decision to sell quite difficult.

Let’s look at another hypothetical example using the price of Innovator’s U.S. Equity Power Buffer – October series (POCT) on April 30, 2024. Let’s assume you bought POCT on the last reset date (September 30, 2023), so your outcome parameters are the same as those shown in the table.

Should you consider an intra-outcome sale of POCT?

The reference asset (SPY) is up 19.32% since the last reset date. POCT has lagged SPY by a significant amount (-8.82%), but is still showing a nice profit of 10.49% in the seven months since the last reset date. Should you consider a sale of POCT to lock in profits? As you know, the unrealized gains are unprotected during the remainder of the outcome period (154 days), so if the reference asset suffers a significant decline, you could lose your profits and some of your principal too. So, does a sale of POCT make sense?

A primary consideration in this hypothetical example is the percentage shown in the column titled “Downside Before Buffer.” The buffer doesn’t protect the unrealized gains you’ve had since your purchase on the last reset date. The ETF could decline 10.29% before the buffer would provide protection. And, during the remainder of the outcome period, if SPY declines by 20% or more, you’ll lose your profits (“Asset -20%”). Does the potential upside of 3.71% (“Remaining Cap”) over the remaining five months of the outcome period warrant taking the risk and potentially losing your profits?

If you hold POCT in a tax-deferred account (e.g., IRA) the gains will not be subject to capital gains tax. If that is the case, then I think a sale of POCT makes complete sense. Your upside potential over the next five months is only 3.71%, but you’re risking nearly 3x as much, given you could lose all your profits. Furthermore, if you take your profits and invest the proceeds of the sale of POCT in Treasury bills, you could earn approximately 2.25%, with no risk, over the remaining five months of the outcome period. So, if you decide to hold POCT to the next reset date, the net upside potential in POCT is only 1.46% more than what you could earn in Treasury bills (3.71% – 2.25% = 1.46%). Is it worth the risk of losing your 10% profit for an additional gain of only 1.46% beyond what Treasury bills will pay you over the next five months? I think not.

In this hypothetical example, the fact that three-month Treasury bills are currently paying approximately 5.4% annualized makes it an easy decision to sell POCT. It’s simply not worth holding POCT, and potentially losing your profits, to earn only 1.46% beyond what you could earn in Treasury bills over the remainder of the outcome period. Again, I think it’s an easy decision to sell if you own POCT in a tax-deferred account.

Another potentially attractive investment strategy is to sell POCT and rotate into PMAY, which resets the same day (April 30) you are considering the sale. Instead of buying Treasury bills, you could rotate (step up) into PMAY and get a fresh buffer at the current price level of the reference asset, with a new upside cap. The upside cap for PMAY is 14.30% (before fees), with 15% downside protection, so this could be a compelling investment over the 12-month outcome period.

Note, if you own POCT in a taxable account, then you have a much more difficult decision. If you’ve only held the position for seven months, and you sell, you could owe short-term capital gains taxes, which are typically taxed at a higher rate than long-term capital gains. So, this gives you incentive to hold the position for another five months. Of course, by holding POCT to get to the next reset date and long-term tax status, you risk losing your profits. Still, I’d lean towards holding POCT to get to long-term tax status, with fresh protection on the next reset date.

In summary, if you decide to sell your shares of POCT, you have two attractive investment options to consider: 1) purchase Treasury bills for the remainder of the outcome period, or 2) invest in PMAY with a new buffer and upside cap.

An intra-outcome sale of a Buffer ETF in a rising market is typically not an easy decision to make. Weigh your answers to the questions in this section carefully.

In the table you can see the potential outcome parameters for the three Buffer ETFs on September 30, 2022. As a refresher, BJAN provides protection against the first 9% loss from the prior reset date, PJAN offers 15% protection, and UJAN provides 30% protection, but not on the first 5% loss (-5% to -35%).

So far in 2022, the reference asset (SPY) has been crushed and is showing a loss of 24.80%. All the Buffer ETFs have held up much better than SPY, as they should during a bear market. UJAN has provided the most protection, showing an unrealized loss of only 7.59%. Nevertheless, all three positions have lost money since the last reset date (“Fund Return”). So, should you step down, realize the losses (tax-loss harvest), and rotate into a new Buffer series with additional downside protection, and a new upside cap? What factors should you consider before making a sale of any or all of the Buffer ETFs?

The additional information below should also be considered prior to making a sale:

Upside caps for the Innovator January 2022 Buffer ETF series:

BJAN: 13.5%
PJAN: 8.99%
UJAN: 6.89%

Upside caps for the Innovator October 2022 Buffer ETF series:

BOCT: 28.45%
POCT: 20.72%
UOCT: 17.08%

Let’s answer the following questions to determine what might be the right course of action:

1. What are the current potential outcome parameters for your Buffer ETFs?

The current outcome parameters make a sale of all the holdings in the January series potentially attractive. The Buffer ETFs have all outperformed the reference asset. For example, UJAN is only down 7.59% while SPY is off 24.80%. This could present an attractive risk-reward scenario from the current lower level of SPY. You could swap out of UJAN, take the tax loss, and purchase BOCT, which has an upside cap of 28.45%, which is considerably higher than the 6.89% upside cap on UJAN at the start of the outcome period (January 1, 2022). BOCT would also provide a 9% downside buffer from the current level while providing a starting upside cap that is much higher than the remaining upside cap of UJAN (14.98%).

A sale of PJAN, which shows a loss of 11.45% (less than half the loss of the reference asset), is also worth considering. Since PJAN has outperformed SPY by a considerable amount, you are in a good position to swap out of PJAN, harvest a tax loss, create a fresh buffer, and also increase the upside cap. You could swap into the 9% or 15% series. The 9% buffer, October series, offers an upside cap of 28.45%, and the 15% buffer offers an attractive 20.72% cap. Sure, you would be locking in a loss, but by not selling, you risk deeper losses because the ETFs are no longer “buffered” against losses – the reference asset has breached the buffer level. At this point, you don’t know if SPY is going to fall further or recover, but by rotating into a new Buffer series you could add more downside protection and still have the potential to recover nicely, with the high upside caps offered by the October series.

A sale of BJAN is perhaps more difficult. It provided minimal protection (9% before fees) against the losses of the reference asset, losing 16.89% while the reference asset declined 24.80%, and BJAN still shows an upside cap of 35.81%. So, if SPY recovers fast, you could recoup some losses. However, with only 92 days remaining in the outcome period, it is unlikely SPY will recoup a significant portion of its losses, and there is also the risk that SPY continues to decline and there is no remaining downside protection at this point. Thankfully, if you decide to step down and rotate out of BJAN and into BOCT, for example, the upside cap is still super attractive with BOCT at 28.45%. So, if SPY recovers over the next 12 months, you could recoup all of your losses and potentially show gains too.

Note, you also have the option to sell your three Buffer ETFs now, take the losses and then swap into SPY (or another index-based ETF), with no downside protection at all. With this strategy, you do not cap your upside return potential, assuming SPY recovers. This strategy could appeal to a more aggressive investor who could withstand additional losses if SPY continues to decline. A purchase of SPY obviously has no downside protection, but it offers unlimited upside potential.

A swap out of the three holdings and into one of the October series Buffer ETFs would likely make the most sense for conservative or moderate-risk investors. This move would provide some additional downside protection, but still allow the potential to recoup losses over the coming 12 months.

2. How far has the reference asset (SPY) declined and how have the Buffer ETFs performed relative to the reference asset?

As mentioned earlier, all three Buffer ETFs that you own have declined less than the reference asset. UJAN has performed the best, relatively speaking, losing 7.59%. PJAN is down 11.45% and BJAN is off 16.89%. The reference asset (SPY) has tumbled 24.8%. So, all three Buffer positions have held up relatively well and you should consider a sale/swap into the October Buffer series that offers a better chance to recoup your losses over a longer time horizon. Thankfully, all the Buffer ETFs in the October series offer compelling upside caps.

It’s also worth noting that if you’re thinking of rotating into a different Buffer series, be mindful of where the reference asset is trading relative to the buffer level. For example, if the reference asset is only slightly below your downside buffer level, all it needs to do is recover into the buffer zone at the end of the outcome period and your ETF will recoup all of its losses. However, if the reference asset is trading significantly below the buffer level, as is the case currently for BJAN, it would have to recover quickly to finish the outcome period inside the buffer for you to recoup your losses. SPY would have to surge over 20% in three months for BJAN to get back in its buffer zone by the end of the outcome period.

It’s important to be aware of the performance difference of the reference asset and your Buffer ETF, and know what percentage the reference asset would need to recover for your ETF to finish the outcome period inside the buffer zone. This information could influence your decision to rotate out, or not.

3. How much time remains in the outcome period?

You only have 92 days remaining in the outcome period for the January series you own, so it doesn’t give you much time to recoup your losses. You need the reference asset to rally quickly to get back into the buffer zones of your current holdings. For your Buffer ETFs that are trading well below the buffers, BJAN, for example, you may decide it’s unlikely it’ll recover enough in three months to get into the buffer zone, which would make stepping down and rotating into the October series perhaps an easier decision, at least for BJAN. Note, UJAN is still trading inside its buffer and still offers more downside protection, so you could decide to hold it. But again, UJAN has also significantly outperformed the reference asset, so it provides you with the best potential to outperform (assuming SPY recovers), if you rotate now to a new Buffer ETF series with a higher cap.

4. What is your risk tolerance? Are you a conservative, moderate, or aggressive investor?

If you have a very low tolerance for risk, you are likely not comfortable with the losses you’re seeing in two of your three Buffer ETF holdings. BJAN and PJAN have both lost quite a bit on a percentage basis, but have still nicely outperformed the reference asset. UJAN is showing a much smaller loss and still offers more downside protection (-5% to -35%), so this position is probably not a big concern for you. If you are a conservative investor, you will likely want to rotate out of BJAN and PJAN to get some additional downside protection from current levels, just in case SPY declines even further before the next reset date.

If you are a moderate or aggressive investor, you may want to capture the outperformance you’ve had and rotate into the new October series that offers higher caps and more time to recover your losses (12 months). If you are somewhat aggressive, you could swap into BOCT, which offers the least amount of additional downside protection, but also the highest cap. Or, you could swap into SPY, with no protection at all, but unlimited upside potential. If you are a moderate-risk investor, you may decide to rotate into POCT since it offers 15% downside protection, but still plenty of upside potential over the next 12 months.

5. Are your positions held in a taxable account? If so, is it advantageous to sell and harvest tax losses?

I think it’s usually a good idea to harvest tax losses whenever you can, so you may want to rotate out of all your Buffer ETFs (January series) that are currently showing losses. A tax-loss carryforward can be valuable and can help offset realized gains indefinitely (can be “carried forward” to future tax years). Still, I wouldn’t let your tax situation alone influence your decision since there are so many other factors to consider.

Note, if you realized taxable gains earlier in the year, and you want to help offset those gains, then you will likely want to harvest your tax losses and rotate into a different Buffer series. Note, in tax-deferred accounts, where there is no reporting of gains or losses to the IRS, this topic is moot.

6. What is your short-term opinion of the direction of the reference asset (SPY)? Do you fear SPY could decline further or do you anticipate a recovery?

Your opinion as to the direction of the reference asset in the coming months could influence your decision to hold or rotate out of the January series. If you fear a further decline in the reference asset, for whatever reasons, you may be inclined to sell now and rotate into a new Buffer series that offers additional downside protection. UJAN still provides more downside protection, but your other two holdings don’t offer any more protection. So, if you think SPY may continue to decline in the remaining few months of the outcome period, you might want a fresh buffer and a swap could make sense.

On the other hand, if you think the selling has exhausted itself and the reference asset is poised to recover quickly, you would likely want to at least sell your two positions that offer the most protection (PJAN and UJAN), and rotate into the October series that offers minimal protection, but has the highest upside cap. Sure, you need to have the necessary risk tolerance to make this move, but it would allow for the most upside potential if you’re correct with your market call. Furthermore, it would provide you with some additional downside protection.

7. What are the starting upside caps for the three Buffer ETFs (BOCT, POCT, and UOCT) that are now resetting on September 30, 2022?

The upside caps for the October series are very attractive. They offer some of the highest caps since Buffer ETFs were first launched in 2018. So, all three of the October Buffer ETFs are worth considering. POCT might be the sweet spot if you are a moderate-risk investor. It offers 15% downside protection, in case the reference asset continues to decline, but it also offers a very attractive upside cap (20.72%) that would allow you to recoup losses if SPY rebounds strongly over the outcome period. The high upside caps of the October series could influence you to rotate out of the January series and into the October series.

Please recognize that options market pricing is hyper-efficient, intra-outcome period. So, despite the higher caps for the October series, staying put in the January series wouldn’t necessarily be a “bad move.” You don’t have to rotate or step down in a declining market, but if you are looking to possibly capitalize on a potential opportunity, and it fits your specific outlook and time horizon, then an intra-outcome trade could indeed be attractive.

There are many factors to consider when deciding if it makes sense to step down and rotate into a new Buffer series in a declining market. Weigh your answers to the questions in this chapter carefully to decide which course of action would make the most sense for you.

Innovator U.S. Equity Power Buffer – January (PJAN)

The graph and table show PJAN tracked its reference asset lower in 2022, but with much less volatility (0.57 beta). The result was a more comfortable investment experience for shareholders compared to holding SPY without any downside protection. At the start of the outcome period, PJAN provided a buffer against the first 15% loss (before fees).

PJAN returned -5.22% during the outcome period while SPY returned -19.48%. PJAN showed a maximum drawdown of -11.88% compared to -25.36% for SPY.

Summary: PJAN provided a buffer against losses of approximately 14.26% (net of fees), as expected, and shareholders considerably outperformed SPY during the outcome period, as they should during a bear market.

PJAN vs. SPY (2022)

UJAN vs. SPY (2022)

Innovator U.S. Equity Ultra Buffer – January (UJAN)

The graph and table show UJAN tracked the reference asset lower in 2022, but with significantly less volatility (0.25 beta). Its return mostly hugged the -5% level for most of the outcome period. The result was a much better investment experience for shareholders compared to holding SPY without any downside protection. At the start of the outcome period, UJAN provided a buffer against a 30% loss, but shareholders were not protected from the first 5% loss. The buffer protects from -5% to -35%. Note, the 2022 bear market was not deep enough to have breached the buffer level, so shareholders were fully protected below -5% throughout the outcome period.

UJAN returned -5.73% during the outcome period while SPY returned -19.48%. UJAN showed a maximum drawdown of -8.82% compared to -25.36% for SPY.

Summary: UJAN provided a deep buffer against losses of approximately 13.75% (net of fees), as expected, and shareholders considerably outperformed SPY during the outcome period.

It’s interesting to compare the performance of PJAN and UJAN during a relatively shallow bear market like 2022. PJAN, which provided 15% downside protection, slightly outperformed UJAN (-5.22% vs. -5.73%), which provided 30% protection, but not on the first 5% loss. The reason for the slight outperformance by PJAN, was the reference asset finished the period down only 19.48%, which is not that much lower than the 15% buffer provided by PJAN. Obviously, if SPY had finished the outcome period down another 10% or so, UJAN would have greatly outperformed PJAN.

With the benefit of hindsight, an investor would have been slightly better off with less protection in PJAN in 2022, than in UJAN, which offered double the amount of protection, but without protection on the first 5% loss. This is somewhat surprising.

Unfortunately, it’s not only impossible to predict a bear market, but it’s also impossible to predict the depth of the decline. Investors would be wise to choose their level of downside protection based on their risk tolerance and other pertinent factors, but not on their ability to predict a bear market.

Two Buffer ETFs from Allianz also provide proof of how shareholders outperformed during the 2022 bear market.

Allianz U.S. Large Cap Buffer 10 – January (JANT)

The graph and table show the performance of Allianz U.S. Large Cap Buffer 10 – January (JANT) vs. its reference asset, SPX (S&P 500).

During the outcome period, JANT mostly tracked its reference asset lower, but with 30% less volatility (0.70 beta). At the start of the outcome period, JANT provided a buffer against the first 10% loss (before fees), with an upside cap of 12%.

JANT returned -10.13% during the outcome period while SPX returned -19.44%. JANT showed a maximum drawdown of -16.07% compared to -25.43% for SPX.

Summary: JANT provided a buffer against losses of approximately 9.31% (net of fees), as expected, and shareholders outperformed SPX during the outcome period.

JANT vs. SPX (2022)

Allianz U.S. Large Cap Buffer 20 – January (JANW)

The graph and table show the performance of Allianz U.S. Large Cap Buffer 20 – January (JANW) vs. its reference asset, SPX (S&P 500), during the 2022 bear market.

JANW tracked its reference asset only slightly lower during much of the outcome period, and with much less volatility (0.38 beta). At the start of the outcome period, JANW provided a buffer against the first 20% loss (before fees).
At the end of the outcome period, JANW returned -0.65% while SPX returned -19.44%. JANW had a maximum drawdown of -8.69% in 2022 compared to -25.43% for SPX.

Summary: JANW provided a buffer against losses of approximately 18.79% (net of fees), as expected, and shareholders greatly outperformed SPX during the outcome period, as they should during a bear market.

It’s helpful to compare the performance of a relatively deep buffer, like Allianz’s Buffer 20 ETF, to major indices in 2022. Sure, 2022 was somewhat unique since nearly all asset classes were highly correlated and declined at the same time, but the benefits of a 20% buffer in a difficult year like 2022 cannot be overstated.

2022 JANW Drawdown & Return Comparison vs. Major Indices

Allianz’s Buffer 20 ETF had a single-digit maximum drawdown in 2022 while the S&P 500 had a maximum drawdown of -24.77%. The Russell 2000 also suffered a maximum drawdown of -25.10%. Bloomberg’s Aggregate Bond Index had a surprisingly large maximum drawdown of nearly -19%. In addition, equities that are supposed to hold up well in bad markets, like S&P 500 Low Volatility, and S&P 500 Dividend Aristocrats, didn’t provide much comfort for investors.

From a performance perspective, JANW was stellar simply because it didn’t lose money (before fees). Its 2022 performance, thanks to its 20% buffer, was -0.65%. JANW outperformed the price return of the S&P 500 by nearly 19%. And, JANW handily beat all the other benchmarks shown in the chart. Bottom line, in a year as challenging as 2022 was for nearly all asset classes, Buffer ETFs like JANW, with moderate to deep protection, provided great value.

Return is based on NAV. Volatility is a statistical measure of the dispersion of returns for a particular asset or index. Beta is a measure of the volatility of an individual stock in comparison to the unsystematic risk of the entire market. Return/Risk is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. Max drawdown is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained.

Performance quoted represents past performance, which is no guarantee of future results. Investment returns and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. Returns less than one year are cumulative. One cannot invest directly in an index.
Current figures are net of accrued outcome period expenses to date. Net figures include outcome period expenses yet to be incurred.

Fund return and current outcome period values assume reinvestment of capital gain distributions, if any. Investors purchasing the fund intra-period will achieve a different defined outcome than those who entered on day one. The remaining cap represents the maximum return the fund can achieve at its current price. The index may need to rise higher or lower than the remaining cap before the remaining cap is realized. If the remaining buffer is greater than the fund’s starting buffer, a portion of the buffer will be realized before the downside before buffer begins. After the downside before buffer has been realized, the final portion of the buffer will begin again.

Innovator U.S. Equity Power Buffer – January (PJAN)

The graph and table show PJAN mostly tracked its reference asset higher in 2023, but with less volatility (0.54 beta). The result was a comfortable investment experience for shareholders, but with some underperformance, which is to be expected with a moderate buffer in a very strong market. At the start of the outcome period, PJAN provided a buffer against the first 15% loss (before fees). The upside cap at the start of the outcome period was indicated at 18.84%.

PJAN provided a return of 18.05% during the outcome period while SPY returned 24.28%. PJAN had a maximum drawdown of -5.75% compared to -10.29% for SPY.

Summary: PJAN mostly tracked the performance of its reference asset during the outcome period, but lagged the return of the reference asset (SPY) by 6.24%.

PJAN vs. SPY (2023)

Innovator U.S. Equity Ultra Buffer – January (UJAN)

The graph and table show UJAN somewhat tracked its reference asset higher in 2023, but with much less volatility (0.46 beta). The result was a positive investment experience for shareholders, but with some meaningful underperformance. At the start of the outcome period, UJAN provided a buffer against a 30% loss (-5% to -35%), but obviously the buffer was not needed in 2023. The upside cap at the start of the outcome period was indicated at 16.40%.

UJAN provided a return of 15.60% during the outcome period while SPY returned 24.28%. UJAN had a maximum drawdown of -4.87% compared to -10.29% for SPY.

Summary: UJAN somewhat tracked the performance of the reference asset during the outcome period, but lagged the return of the reference asset (SPY) by 8.69%.

UJAN vs. SPY (2023)

The performance of two Buffer ETFs from Allianz shows how their Buffer ETFs (January series) performed during the 2023 bull market, after providing much-needed protection during the 2022 bear market.

Allianz U.S. Large Cap Buffer 10 – January (JANT)

The graph and table show the performance of Allianz U.S. Large Cap Buffer 10 – January series (JANT) vs. its reference asset (SPY).

JANT mostly tracked its reference asset higher in 2023, but with less volatility (0.73 beta). The result was a worry-free investment experience for shareholders, but with slight underperformance. At the start of the outcome period, JANT provided a buffer against the first 10% loss (before fees). The upside cap at the start of the outcome period was indicated at 23.41%.

JANT provided a return of 22.61% during the outcome period while SPY returned 24.28%. JANT had a maximum drawdown of -7.70% compared to -10.29% for SPY.

Summary: JANT closely tracked SPY during the outcome period, but slightly lagged the return of the reference asset (SPY) by 1.68%.

JANT vs. SPY (2023)

Allianz U.S. Large Cap Buffer 20 – January (JANW)

The graph and table show the performance of Allianz U.S. Large Cap Buffer 20 – January series (JANW) vs. its reference asset (SPY).

JANW somewhat tracked its reference asset higher in 2023, but with much less volatility (0.42 beta). The result was a smooth ride for shareholders, but with some underperformance, which is to be expected with a relatively deep buffer in a strong market. At the start of the outcome period, JANW provided a buffer against the first 20% loss (before fees). The upside cap at the start of the outcome period was 15.49%.

JANW provided a return of 14.69% during the outcome period while SPY returned 24.28%. JANW had a maximum drawdown of -4.08% compared to -10.29% for SPY.

Summary: JANW somewhat tracked the reference asset during the outcome period, but lagged the return of the reference asset (SPY) by 9.59%.

JANW vs. SPY (2023)

With the benefit of hindsight, an investor would have obviously wanted the least amount of protection in 2023, which would have allowed for the highest upside cap. BJAN or JANT would have been ideal choices in 2023 since they both provided nearly full participation in the gains of the reference asset.

What’s critical to note is the Buffer ETFs all performed as expected given the defined outcome parameters provided by the issuing companies at the start of the outcome period.

Return is based on NAV. Volatility is a statistical measure of the dispersion of returns for a particular asset or index. Beta is a measure of the volatility of an individual stock in comparison to the unsystematic risk of the entire market. Return/Risk is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. Max drawdown is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained.

Performance quoted represents past performance, which is no guarantee of future results. Investment returns and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. Returns less than one year are cumulative. One cannot invest directly in an index.

Current figures are net of accrued outcome period expenses to date. Net figures include outcome period expenses yet to be incurred.

Fund return and current outcome period values assume reinvestment of capital gain distributions, if any. Investors purchasing the fund intra-period will achieve a different defined outcome than those who entered on day one. The remaining cap represents the maximum return the fund can achieve at its current price. The index may need to rise higher or lower than the remaining cap before the remaining cap is realized. If the remaining buffer is greater than the fund’s starting buffer, a portion of the buffer will be realized before the downside before buffer begins. After the downside before buffer has been realized, the final portion of the buffer will begin again.

Innovator U.S. Equity Power Buffer – January (PJAN)

The graph and table show PJAN mostly tracked its reference asset during the two-year period, but with quite a bit less volatility (0.56 beta). The result was an easier ride for shareholders compared to holding SPY without any downside protection. At the start of each outcome period, PJAN provided a buffer against the first 15% loss (before fees).

PJAN had a total return of 11.89% during the two-year period while SPY returned 3.26%, including dividends. PJAN showed a maximum drawdown of -11.88% compared to -24.50% for SPY.

Summary: PJAN provided an important buffer against losses during the 2022 bear market and handily outperformed the reference asset (SPY) by 8.63% over the two-year period

PJAN vs. SPY (2022 – 2023)

Innovator U.S. Equity Ultra Buffer – January (UJAN)

The graph and table show UJAN somewhat tracked its reference asset, but with significantly less volatility (0.30 beta). Its return mostly hugged the -5% level during the 2022 bear market, and then it participated in the upside during the bull market in 2023. At the start of each outcome period, UJAN provided a buffer against a 30% loss (before fees), but shareholders were not protected from the first 5% loss. The buffer protects from -5% to -35%.

During the two-year, bear-to-bull market period, UJAN had a total return of 8.98% while SPY returned 3.26%, including dividends. UJAN showed a maximum drawdown of -8.82% compared to -24.50% for SPY.

Summary: UJAN provided a deep buffer against losses during the 2022 bear market and outperformed the reference asset (SPY) by 5.72% over the two-year period.

UJAN vs. SPY (2022 – 2023)

It’s worth noting that all three Innovator January Buffer ETF series, with their various levels of downside protection and upside caps, were able to outperform SPY during the two-year, bear-to-bull market period. The data provide evidence of the value of “losing less” during a bear market (2022), thanks to the downside protection provided by Buffer ETFs, and how shareholders can also participate during a market rebound (2023).

BJAN, PJAN, UJAN (2022 – 2023)

Return is based on NAV. Volatility is a statistical measure of the dispersion of returns for a particular asset or index. Beta is a measure of the volatility of an individual stock in comparison to the unsystematic risk of the entire market. Return/Risk is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. Max drawdown is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained.

Performance quoted represents past performance, which is no guarantee of future results. Investment returns and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. Returns less than one year are cumulative. One cannot invest directly in an index.

Current figures are net of accrued Outcome Period expenses to date. Net figures include Outcome Period expenses yet to be incurred.

Fund return and current outcome period values assume reinvestment of capital gain distributions, if any. Investors purchasing the fund intra-period will achieve a different defined outcome than those who entered on day one. The remaining cap represents the maximum return the fund can achieve at its current price. The index may need to rise higher or lower than the remaining cap before the remaining cap is realized. If the remaining buffer is greater than the fund’s starting buffer, a portion of the buffer will be realized before the downside before buffer begins. After the downside before buffer has been realized, the final portion of the buffer will begin again.

Allianz U.S. Large Cap Buffer 10 – January (JANT)

You can see in the graph and table that during the two-year period, JANT mostly tracked its reference asset, but with 30% less volatility. At the start of each outcome period, JANT provided a buffer against the first 10% loss (before fees).

JANT had a total return of 10.18% during the two-year period while SPY returned 3.26%, including dividends. JANT showed a maximum drawdown of -16.07% compared to -24.50% for SPY.

Summary: JANT provided a minimal buffer against losses during the 2022 bear market, but it was enough protection to help JANT outperform the reference asset (SPY) by 6.92% over the two-year period. Note, the graph shows the price returns for SPY, but data in the table include dividends.

JANT vs. SPY (2022-2023)

Allianz U.S. Large Cap Buffer 20 – January (JANW)

The graph and table show JANW mostly tracked its reference asset during the two-year period, but with much less volatility (0.38 beta). The result was a very comfortable investment experience for shareholders compared to holding SPY without any downside protection. At the start of each outcome period, JANW provided a buffer against the first 20% loss (before fees).

JANW had a total return of 13.97% during the two-year period while SPY returned 3.26%, including dividends. JANW showed a maximum drawdown of -8.69% compared to -24.50% for SPY.

Summary: JANW provided an important buffer against all losses during the 2022 bear market and handily outperformed the reference asset (SPY) by 10.71% over the two-year period. Note, the graph shows the price returns for SPY, but data in the table include dividends.

JANW vs. SPY (2022-2023)

It’s worth highlighting that during the 2022-2023 bear-to-bull market, JANW was the best performer of the five Buffer ETFs reviewed in this case study. And, all the Buffer ETFs that were analyzed, with their various levels of downside protection and upside caps, outperformed SPY over the two-year period.

Return is based on NAV. Volatility is a statistical measure of the dispersion of returns for a particular asset or index. Beta is a measure of the volatility of an individual stock in comparison to the unsystematic risk of the entire market. Return/Risk is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. Max drawdown is the maximum observed loss from a peak to a trough of a portfolio, before a new peak is attained.

Performance quoted represents past performance, which is no guarantee of future results. Investment returns and principal value will fluctuate, so you may have a gain or loss when shares are sold. Current performance may be higher or lower than that quoted. Returns less than one year are cumulative. One cannot invest directly in an index.

Current figures are net of accrued outcome period expenses to date. Net figures include outcome period expenses yet to be incurred.

Fund return and current outcome period values assume reinvestment of capital gain distributions, if any. Investors purchasing the fund intra-period will achieve a different defined outcome than those who entered on day one. The remaining cap represents the maximum return the fund can achieve at its current price. The index may need to rise higher or lower than the remaining cap before the remaining cap is realized. If the remaining buffer is greater than the fund’s starting buffer, a portion of the buffer will be realized before the downside before buffer begins. After the downside before buffer has been realized, the final portion of the buffer will begin again.
 

It is important to note that you should never buy an Uncapped Buffer ETF with the expectation that you will outperform the market. You buy a buffer because you are not comfortable taking on all the downside risk of the S&P 500 – you want some protection. However, while you shouldn’t expect to outperform with an Uncapped Buffer ETF, in certain markets, over multiple years, it could happen.

The combination of a 15% buffer and uncapped upside above the spread, allows you to participate in strong equity returns and market rallies. Uncapped Buffer ETFs offer the potential to generate exceptional performance, not only over a specific 12-month outcome period, but over multiple years. In addition, you have downside protection on the first 15% loss from each reset date. Moderate protection plus unlimited upside, above the spread, is an attractive combination.

Uncapped Buffer ETFs vs. Capped Buffer ETFs

Let’s compare hypothetical returns of an Uncapped Buffer ETF to a capped version. We’ll assume both ETFs provide a 15% buffer at the start of each outcome period. In this hypothetical example, the traditional Buffer ETF has an upside cap of 14% (before fees) and the Uncapped Buffer ETF has a spread of 3% (before fees). We’ll assume the S&P 500 pays annual dividend income of 1.7%.

Scenario 1: S&P 500 finishes inside the spread with a return of 2%.

Scenario 2: S&P 500 finishes below the spread, but inside the buffer, losing 14%.

Scenario 3: S&P 500 finishes below the spread and below the buffer, losing 20%.

Scenario 4: S&P 500 finishes above the spread, but below the cap, with a 12% return.

Scenario 5: S&P 500 finishes above the spread and above the cap, with a return of 30%.

Uncapped Buffer ETFs have one of the most intriguing payoff profiles in the Buffer ETF space. Please consider these offerings, particularly when stock prices are depressed and trading at historically attractive valuations.