Downside-Protected Funds Go From Hard Sells to Must-Haves

With markets cratering, investors flood into defined-outcome ETFs.

Alex Kraus/Bloomberg

Alex Kraus/Bloomberg

In August 2018, Innovator Capital Management, started by Bruce Bond and John Southard — the founders of PowerShares (now part of Invesco) — listed first-of-their-kind ETFs that give exposure to stock index returns but also downside protection.

Bond and Southard had good timing. Innovator Capital Management reaped $150.1 million of net inflows into its defined-outcome ETFs in February, another $44 million between March 2 and March 6, and an estimated $60 million on Monday alone. For the year through March 9, Innovator’s inflows totalled $448.7 million, making it one of the fastest-growing ETF providers. The company sells buffer ETFs that give investors exposure to the Standard & Poor’s 500 stock index, Russell 2000, MSCI EAFE, MSCI Emerging Markets index, and the Nasdaq 100.

“We’ve been trying to get people interested in the product and explain the benefits,” said Bond in an interview. “But it’s been difficult to get them to connect with the value of the products until now. Having a built-in buffer has a value, especially if people aren’t comfortable with the overall risk in the market.”

That has changed. “For some, they may see a buying opportunity but the markets could also continue to slide. If the market zooms up, you’ll be part of it, but if there’s a slide, you’ll have some protection,” Bond went on.

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Innovator’s success may spawn copycats. Allianz Investment Management — the investment management subsidiary of Allianz Life and separate from Allianz Global Investors — plans to offer five similar ETFs, according to a filing with the Securities and Exchange Commission. Insurer Allianz Life already sell annuities that offer exposure to stock market increases, while limiting investors’ losses.

At its start, Innovator aimed to disrupt the insurance and structured products industries, which offer similar defined outcomes, but through far more expensive products with limited liquidity. Innovator charges a management fee of between 0.79 and 0.89 percent, depending on the ETF product, which Milliman Financial Risk Management (Milliman FRM) subadvises on.

Bond said he’s not concerned about Allianz’s plans to roll out its own product line. Innovator has filed for patents on the names “Buffer” ETFs and “Defined Outcome” ETFs, as well as for the processes for structuring these products. Bond believes that any asset manager trying to launch defined-outcome ETFs would have to license the patent, if it’s approved.

Allianz’s move caught few by surprise. (The firm declined to comment.) Mohammed El-Erian, the firm’s chief economic advisor, tweeted out a Wall Street Journal story about Innovator Capital’s defined-outcome ETFs last year. Then Allianz Life filed plans with SEC in December for similar ETFs.