Worried About Market Bubbles? Innovator Capital Offers 160 ETFs to Help You Navigate the Bull Market
The stock market has been quite the rollercoaster. Imagine this: if someone put $100,000 into the S&P 500 back in 2009, after the financial crisis, they’d have over $1 million today. But as this bull market continues, there’s growing concern about a potential crash. The St. Louis Federal Reserve reported that a staggering $7.5 trillion is now parked in money market funds, reflecting a 57% increase from $4.8 trillion five years ago.
Bruce Bond and John Southard, from Innovator Capital Management in Wheaton, Illinois, believe they have a solution for anxious investors. Their Innovator Fund, which manages around $28 billion, focuses on ETFs designed to offer protection against market downturns—often referred to as outcome-oriented funds. They hedge potential losses using option contracts, which keeps returns in check, but for many, the reassurance might be worth it. The U.S. Stock Power Buffer ETF is the most well-known product, safeguarding investors against the first 15% drop in the S&P 500 while currently allowing for returns of up to 13%.
Since launching their first fund in 2018, Innovator’s assets have surged, although the fund hasn’t outpaced its index. It’s notable that it charges 26 times more than ETFs from Vanguard or BlackRock. Investment experts, like billionaire quant Cliff Asness, have suggested that there’s a more cost-effective method for achieving downside protection by allocating a mix of Treasuries and stocks.
Bond argues that Asness’ view overlooks the underlying concern of many investors who are steering clear of the stock market. He often asks, “If your nest egg were represented by a bowling ball, wouldn’t you want bumpers to help keep it on track?” His southern drawl still shines through, despite his years in Chicago. “It’s about minimizing the risk of losing a few pins to avoid a total gutter ball.”
The U.S. Stock Power Buffer ETF, boasting $10 billion in assets, issues monthly under tickers like PJAN, PFEB, and PMAR, providing a safety net for the first 15% of annual losses on the S&P 500. Each fund’s portfolio is renewed annually with a new set of options contracts.
The mechanics are simple: each month, Innovator acquires a put option at the current S&P 500 price and sells another put option 15% lower, with each put option expiring in a year. Then they sell call options—those are a bit further out-of-the-money—to offset the costs, which essentially limits the potential upside depending on market conditions. (Put options allow selling securities at a predetermined price; call options let you purchase them.)
For instance, PJAN, which has a 15% buffer for each calendar year, faces a 12% cap in 2025. This implies that while investors fall short of the index’s 14.5% year-to-date gain, they won’t benefit from additional gains for the remainder of the year. Previous years tell a similar story: 2024 saw a 13.5% return, but the index gained 23%, and 2023 delivered 18% against the market’s 24.3% bump. However, during the market’s 20% decline in 2022, PJAN only registered a 5% drop.
When you look at the numbers, the fund’s annualized return of 9.3% since early 2019 trails the S&P 500’s 15.6% growth. Yet, those invested in the fund would feel less of a sting should this bull market take an unexpected turn.
Innovator is rolling out a new set of products in July 2023, featuring options like a 9% buffer with a higher cap, a 30% buffer with a lower cap, and even a 100% buffer. Costs for these new funds are capped around 7% this year. Besides the S&P 500, the company also offers buffers for the Nasdaq 100 and Russell 2000, as well as international markets. Their expense ratios range from 0.79% to 0.89%, making them relatively pricey.
According to Southard, who is 56 and serves as Innovator’s president, these products cater to individuals nearing or in retirement—those who don’t seek to double their wealth but rather preserve what they have. “Honestly, high market values can present an opportunity to buy products that offer added downside protection,” he notes.
This isn’t Bond and Southard’s first venture into ETFs. Their collaboration dates back to the 1990s at First Trust, where Bond later transitioned to a role in product marketing at Nuveen. After plans for Nuveen’s ETF business fell through, he expressed interest in starting his own after purchasing a smaller firm. He brought Southard on board for their venture in 2002, launching PowerShares Capital Management.
In a short span, PowerShares rolled out 36 ETFs and attracted $3.5 billion in assets, focusing on niches like clean energy and water treatment. They eventually sold the venture to Amvescap—now Invesco—for $60 million initially, which later ballooned to $260 million following earnings.
Despite working to develop PowerShares further under Invesco, both Bond and Southard exited in 2011. Southard began a real estate investment firm while Bond took a break for hunting and fishing. In late 2015, Southard reached out to Bond regarding a structured insurance product emphasizing downside protection.
“It’s surprising that these options weren’t available in an ETF format,” Bond recalled.
In 2017, they acquired Innovator Management, which already managed the Innovator IBD 50 ETF, allowing them to sidestep regulatory hurdles associated with starting afresh. Within a year, they launched the first buffer ETF globally.
Their innovation sparked a wave of similar companies, like First Trust and Allianz, and the buffer ETF sector now manages a collective $75 billion. The Defined Outcome Strategies have drawn $10.8 billion this year alone, with Innovator and First Trust each claiming over $4 billion.
For more cautious investors, there’s a new range of “bidirectional” ETFs from Innovator. These use additional options to generate returns, even when the market declines. The Equity Dual Directional 15 Buffer ETF (DDFL), introduced in July, offers a positive 15% return if the S&P 500 decreases by up to that amount, although the upside is limited to 8.8% when stocks rise.
Bond has plenty of ideas for growth moving forward, and a potential acquisition might be in sight. Forbes estimates managing bubble protection ETFs could be valued at around $2 billion—showing that true pioneers like Bond and Southard always thrive when it comes to providing peace of mind for investors.
