Many financial advisors currently face a trilemma: clients holding excess cash, equity markets feeling precarious, and a bond market that has largely failed to deliver on its traditional defensive role. The resulting allocation challenge requires innovative solutions that address multiple concerns simultaneously. Innovator ETFs®’ Defined Wealth Shield ETF (ticker: BALT) has emerged as a potential option for those seeking equity exposure with a built-in buffer on the downside.
Unlike traditional bonds, which depend on interest rates and have underperformed in recent years, BALT resets quarterly to maintain fresh protection against losses while still capturing equity market upside. In an interview with The Wealth Advisor’s Scott Martin, Andrew Nelson, Director of Product Strategy at Innovator ETFs, discussed how the firm’s quarterly exchange-traded fund (ETF) buffer suite—particularly BALT—offers advisors a compelling equity alternative to traditional bonds while reducing volatility and drawdowns in today’s uncertain market.
The Fixed Income Conundrum
Traditional bond allocations have left many advisors and their clients disappointed in recent years, underperforming during periods when stability was most needed. At the same time, clients hesitate to enter markets perceived as overvalued. As a result, many investors are stuck on the sidelines.
“We’re getting questions around three areas right now,” Nelson explains. “They still have a lot of cash on their books. Equity markets are still at or near all-time highs, and it feels fragile perhaps. And then what we call the bond conundrum.”
With cash earning little return, equities appearing potentially risky, and bonds failing to provide security, advisors may need an allocation tool that bridges multiple gaps. This is where BALT’s structured approach comes into play—offering market participation with a direct equity hedge that traditional fixed income lacks.
The disappointment with fixed income performance has become particularly acute. According to Nelson, when surveying advisors about bond performance expectations, “two-thirds of our respondents said ‘no’” when asked if fixed income had delivered as anticipated. So, finding alternative defensive allocations has become a top priority. Many advisors are now turning to buffer strategies—such as BALT—as a way to mitigate the potential impacts of negative market movements while still capturing upside potential, offering a compelling solution to the modern bond dilemma.
How BALT Works: Buffered ETFs™ for Hedged Equity Exposure
BALT provides equity exposure to the S&P 500 with a compelling buffer against losses, designed to create stability more commonly associated with fixed income. Unlike traditional bonds, however, BALT’s mechanical structure aims to create outcomes that are more predictable than those dependent on interest rate movements.
The strategy operates on a quarterly reset cycle. This three-month rhythm allows the ETF to provide fresh protection at regular intervals, adapting to changing market conditions throughout the year.
For BALT specifically, the strategy rebalances quarterly toward a 20% buffer—a significant potential safeguard against market declines. “You are really adding a lot of [sought-after] protection on the downside,” Nelson says.
The strategy’s return potential includes a cap that typically ranges between 2% and 4% per quarter. An important clarification, Nelson explains that caps are quoted as quarterly figures rather than annualized returns. The cap can adjust based on market conditions, with potential to rise during periods of higher volatility.
Market history reinforces BALT’s structural potential. The buffer seeks to provide meaningful protection against all but the most extreme market environments while still allowing for participation in equity market growth up to the specified cap.
When to Consider BALT Over Traditional Bonds
Even as BALT provides exposure to the S&P 500, its engineered return profile has delivered characteristics traditionally associated with bond allocations—lower volatility, downside mitigation, and steadier returns. The deep 20% quarterly buffer creates volatility patterns more reminiscent of fixed income than traditional equity.
Nelson offers an important distinction for advisors: “If the conversation is about fixed income for the income’s sake, then stay in fixed income. If the conversation is about fixed income for diversification, that defensive sake, let’s consider BALT as a possibility.”
Since launching in mid-2021, BALT has demonstrated resilience during a turbulent period for bonds. Nelson points out that while the Bloomberg U.S. Aggregate Bond Index experienced elevated volatility and negative annualized returns through December, BALT delivered on its design—offering market participation with built-in risk reduction—steadily trending upward in line with expectations.
For clients focused on capital preservation, smoother return profiles, and mitigated equity exposure risk, BALT offers a modern alternative, particularly for advisors looking to replace a portion of the 40% fixed income allocation in a 60/40 portfolio.
Tax Efficiency and Liquidity Advantages
Beyond performance characteristics, BALT offers tax efficiency compared to traditional fixed income vehicles. Where bond ETFs typically distribute income monthly or quarterly, generally creating taxable events even when reinvested, BALT operates with tax efficiency inherent to the ETF wrapper.
“Our ETFs are designed to limit distributions,” Nelson explains. “From a total return standpoint, when you apply this kind of tax effect to the ETF, you are reducing your return more than people realize.”
Tax treatment is straightforward with BALT—investors incur taxes only upon sale of the ETF because there are no regular distributions. This approach seeks to eliminate the ongoing tax burden associated with fixed income distributions, potentially enhancing after-tax returns for investors in taxable accounts.
Operational simplicity extends to implementation and liquidity. Unlike structured notes, BALT functions with the liquidity inherent to the ETF wrapper. The strategy offers standard ETF accessibility with intra-period liquidity, no lockup periods, and no investment minimums, making it readily available for advisors managing portfolios of varying sizes.
The automatic quarterly reset happens “under the hood, with no action needed on your part,” Nelson says. Every calendar quarter, the ETF rebalances to target a fresh 20% buffer from current market levels, with the cap adjusting based on protection costs—eliminating the need for advisors to time entries and exits or make tactical decisions about protection levels.
Replacing a Portion of the 40 in a 60/40 Portfolio
For advisors reconsidering traditional 60/40 portfolios, BALT offers a potential replacement for portions of the fixed income allocation. While some clients might reduce equity exposure in favor of BALT, Nelson observes that the ETF could serve to replace a portion of the bond allocation, particularly where those traditional fixed income positions have failed to provide expected defensive characteristics.
Innovator has developed research supporting the potential replacement of traditional bonds with buffered strategies. Its white paper “From Bonds to Buffers” explores how Buffer ETFs™ can pursue defensive portfolio characteristics without relying solely on traditional fixed income.
The firm’s analysis shows that, historically, a bond’s yield to maturity has been a reliable indicator of its eventual total return. With yields at historic lows, future bond returns are likely to be significantly lower than in previous decades.
For clients seeking portfolio stabilizers but concerned about bond market uncertainty, BALT is designed to provide an alternative that keeps some equity market participation while delivering the volatility management. The strategy represents a modern evolution in defensive portfolio construction, addressing contemporary challenges in traditional asset allocation models.
A Way to Reallocate Cash
For advisors guiding clients with cash on the sidelines, BALT might represent a middle path—neither fully aggressive equity exposure nor the uncertain returns of today’s bonds. The strategy’s combination of capped equity upside potential, significant mitigation on the downside, tax efficiency, and operational simplicity creates a potentially powerful tool for portfolio construction.
BALT’s built-in protection mechanism may be desirable for clients who are hesitant to deploy cash in equity markets at elevated valuations. Those seeking a more thoughtful entry might find the strategy’s design helps balance market participation with risk management.
Nelson notes that Innovator has seen significant client interest in BALT, specifically as a conservative equity portfolio allocation that has provided substantial value. “It’s a good example of Innovator providing client solutions in multiple ways and multiple flavors,” he says.
For advisors seeking to replace traditional fixed income with hedged equity alternatives, BALT’s buffered approach offers a compelling consideration—one that addresses multiple client concerns while potentially delivering more predictable outcomes than bonds alone.
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Additional Resources
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Disclosures
The Bloomberg U.S. Aggregate Bond Index broadly tracks the performance of the U.S. investment-grade bond market. The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S .
An Important Note about Buffer ETFs™ and Bonds:
BALT seeks to track the return of the SPDR S&P 500 ETF Trust (SPY), to a cap, while targeting a 20% buffer against losses over the quarterly outcome period. Both strategies use FLEX options to gain exposure. Buffer ETFs™ carry equity risk, which has historically been greater than bond risk. In order to produce a positive return, BALT needs equities to rise. If the equities fall more than the predetermined buffer, investors risk a loss.
Unlike equities, bonds pay coupons and their returns are not directly tied to the equity market. The price of a bond does not need to increase for an investor to profit. In addition, the price of bonds is affected by supply and demand. As a result, the price of bonds has historically risen when equities have fallen as investors seek safety outside of equities. Bonds have maturity dates at which point principal must be repaid or a default occurs. Bonds are higher in the capital structure than equities, and therefore, generally carry lower risk of loss.
In addition, Buffer ETFs™ do not provide income which is a common investment objective of bond funds. The underlying options provide exposure to the price-return of their respective reference asset, and therefore, investors do not receive dividends or investment income through an investment in a Buffer fund.
The Fund has characteristics unlike many other traditional investment products and may not be suitable for all investors. For more information regarding whether an investment in the Fund is right for you, please see “Investor Suitability” in the prospectus.
The Fund faces numerous market trading risks, including active markets risk, authorized participation concentration risk, buffered loss risk, cap change risk, capped upside return risk, correlation risk, liquidity risk, management risk, market maker risk, market risk, non-diversification risk, operation risk, options risk, trading issues risk, upside participation risk and valuation risk. For a detail list of Fund risks see the prospectus.
There is no guarantee that the Outcomes for an Outcome Period will be realized or that the Fund will achieve its investment objective. Investors purchasing shares after an Outcome Period has begun may experience very different results than the Fund’s investment objective. The Fund will not terminate after the conclusion of an Outcome Period. After the conclusion of the Outcome Period, another will begin.
Fund shareholders are subject to an upside return cap (the “Cap”) that represents the maximum percentage return an investor can achieve from an investment in the Fund for the Outcome Period, before fees and expenses. If the Outcome Period has begun and the Fund has increased in value to a level near to the Cap, an investor purchasing at that price has little or no ability to achieve gains but remains vulnerable to downside risks. Additionally, the Cap may rise or fall from one Outcome Period to the next. The Cap, and the Fund’s position relative to it, should be considered before investing in the Fund. The Funds’ website, www.innovatoretfs.com, provides important Fund information as well information relating to the potential outcomes of an investment in a Fund on a daily basis.
The Fund only seeks to provide shareholders that hold shares for the entire Outcome Period with their respective buffer level against losses of the SPY during the Outcome Period. You will bear all reference asset losses exceeding the buffer. Depending upon market conditions at the time of purchase, a shareholder that purchases shares after the Outcome Period has begun may also lose their entire investment. For instance, if the Outcome Period has begun and the Fund has decreased in value beyond the pre-determined buffer, an investor purchasing shares sat that price may not benefit from the buffer. Similarly, if the Outcome Period has begun and the Fund has increased in value, an investor purchasing shares at that price may not benefit from the buffer until the Fund’s value has decreased to its value at the commencement of the Outcome Period.
The Fund is designed to provide point-to-point exposure to the price return of the Reference Asset via a basket of FLEX Options. As a result, the Fund is not expected to move directly in line with the Reference Asset during the interim period.
Although the Fund targets a 20% buffer, it may fall into a range of 15–20%; there is no guarantee that the buffer will be within this range or that the Fund will provide the buffer.
FLEX Options Risk. The Fund will utilize FLEX Options issued and guaranteed for settlement by the Options Clearing Corporation(OCC). In the unlikely event that the OCC becomes insolvent or is otherwise unable to meet its settlement obligations, the Fund could suffer significant losses. Additionally, FLEX Options may be less liquid than standard options. Ina less liquid market for the FLEX Options, the Fund may have difficulty closing out certain FLEX Options positions at desired times and prices. The values of FLEX Options do not increase or decrease at the same rate as the reference asset and may vary due to factors other than the price of reference asset.
This material does not constitute tax advice. Investors should consult with tax professionals for tax advice and not rely upon information disseminated by Innovator. Past distributions are not indicative of future distributions. Transactions in ETF shares may result in brokerage commissions and will generate tax consequences. Investors should consider their current and anticipated investment horizon and income tax bracket when making an investment decision as illustrations herein do not reflect these factors.
The Funds’ investment objectives, risks, charges and expenses should be considered carefully before investing. The prospectus and summary prospectus contains this and other important information, and it may be obtained at innovatoretfs.com. Read it carefully before investing.
Investing involves risks. Loss of principal is possible. Innovator ETFs are distributed by Foreside Fund Services, LLC.
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