In a market that can’t make up its mind between a bull stampede and panic attack, Innovator Capital Management is providing investors with the financial version of a Kevlar vest. The firm launched the Innovator Equity Managed 100 Buffer ETF (NYSE:BFRZ) on May 13, expanding its roster of innovative buffer-based portfolio strategies. The ETF delivers 100% protection from the downside with a dash of equity upside.
This isn’t your run-of-the-mill hedged fund-lite play. With a 0.89% net expense ratio, BFRZ goes after equity returns while protecting investors from outright loss over a year—grace of a finely choreographed laddered options structure.
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Innovator CIO Graham Day said that the fund was designed to provide enhanced potential for return and inherent protection against the down side versus the mysterious hedging potential of bonds and the performance track record of numerous hedge funds. Advisors that require downside protection along with up side potential will benefit more from this strategy, according to Day.
BFRZ starts by investing in the companies of the Solactive GBS United States 500 Index, which tracks the largest 500 companies in the U.S. equity universe. But where it really innovates is in its multi-layered risk protection.
Rather than a one-and-done strategy, BFRZ employs four one-year put options, three months apart when they expire. This laddered structure provides only 25% of the cover layer resetting quarterly, providing a rolling shield that smooths timing risk. To this, the ETF adds short-term call options with staggered expirations to pursue a little bit of upside, but within bounds.
Essentially, it seeks to provide about 40%–50% upside participation in equities with 100% protection on the downside over rolling one-year periods (before fees and expenses), with a maximum loss limited to only 1–3%. Constructed with resilience in mind, the fund aims for positive returns in advancing and declining markets and has a volatility profile of about one-third that of the S&P 500, and thus is a very attractive option for risk-sensitive investors who need growth with an in-built parachute.
What makes BFRZ stand out is that it steers clear of the “reset-and-regret” trap that befalls so many conventional buffer ETFs, allowing advisors and investors to remain on track without monitoring the calendar.
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