As advisors seek solutions for clients hesitant about market exposure at all-time highs or looking to put cash to work, Innovator Capital Management’s latest exchange-traded fund (ETF) product offers an intriguing potential proposition: complete downside protection with capped upside potential.
In an interview with The Wealth Advisor’s Scott Martin, Andrew Nelson, Director of Product Strategy at Innovator, discussed how the firm’s 100% Buffer ETFs™, also known as Defined Protection ETFs, are seeking to provide advisors with a new tool that combines the benefits of protective strategies with the efficiency of the ETF wrapper.
Implementation Flexibility
For advisors evaluating where buffer ETFs might fit in their practice, Innovator’s solutions offer a range of portfolio applications. As Nelson notes, they can serve as a core defensive equity position for conservative clients, a tactical tool for reducing risk at market highs, or a strategic alternative to low-yielding cash positions. The strategy may be particularly relevant for clients nearing retirement who want to maintain market exposure while limiting downside risk, he adds, or for those who have been hesitant to deploy cash in the current market environment.
Also, the versatility of Innovator’s buffer ETF lineup may allow advisors to tailor protection strategies to specific client needs. The funds are available in different time horizons—six months, one year, and two years—allowing advisors to match protection periods with client needs. Nelson identifies three primary use cases advisors are finding for the products:
- Cash deployment: For clients holding significant cash positions, the funds offer a way to gain market exposure while maintaining principal protection.
- Risk management at market highs: For advisors whose clients are concerned about market valuations, the strategy allows continued market participation while implementing comprehensive downside protection.
- Tax efficiency: The ETF structure provides tax advantages compared to traditional fixed-income alternatives, particularly for high-income clients.
The diverse applications and implementation flexibility make the funds particularly potentially valuable for advisors managing clients across different life stages and risk tolerances.
Understanding the Structure
Despite the sophisticated outcome the funds achieve, the underlying structure is relatively straightforward. “While we are using options under the hood to construct this outcome, it’s actually not quite as complex as people think,” Nelson explains. “It’s very transparent.” The ETFs’ construction consists of just three option positions, creating a streamlined approach to achieving the desired outcome.
“The gist of it is that you are protected entirely on your downside, before fees and expenses of course, over the life cycle of its outcome period. And you also do achieve upside to a cap,” explains Nelson. “This really fits a very nice window of a cash-like idea that is going to be competing with ultra-short bonds or cash on the sidelines.”
The product aims to solve several persistent challenges for advisors, particularly those managing conservative clients or those seeking to redeploy cash in an uncertain market environment. Although similar protection strategies have traditionally been available through insurance products or structured notes, Innovator’s ETF structure eliminates many common pain points.
“We’re not saying that you should never use those, but the ETF wrapper solves a lot of the issues,” Nelson notes. “Things like illiquidity or surrender fees, high fees, lockups, all the things you might hear about from, say, some of the negatives on those wrappers are solved with the ETF wrapper.”
The funds reset periodically, with different tickers corresponding to different months and protection periods. For example, “JAJL means January to July.” That fund reset at the beginning of January, “and you’re going to have six months of 100% downside protection that’ll reset in July,” Nelson details. For longer protection periods, “ZJAN for Z January” offers the same methodology over a one-year timeframe.
Performance and Client Psychology
With a track record now established, it appears the buffer ETFs are demonstrating their value proposition in real market conditions, and early results have been promising. “We’ve seen it outperform cash, we’ve seen it outperform bonds, we’ve seen it do so with less volatility,” Nelson reports. This performance, combined with the complete downside protection, has resonated with both advisors and clients.
The strategy’s appeal often comes down to the psychological comfort it provides. Nelson references that while average market returns after hitting all-time highs were approximately 12% at year-end 2024, many clients are comfortable accepting a lower capped return in exchange for protection. “You could get, say, 8% with 100% protection or 12% with 0% protection,” he explains. “There’s this element of that trade-off that makes a lot of sense to clients when you pose it in that light.”
The balance between protection and potential return has proven particularly compelling for risk-averse clients seeking market participation, he points out.
Thoughtful Simplicity
For advisors concerned about operational complexity, the funds are designed to be straightforward to implement and maintain. The protection and caps reset automatically at the end of each outcome period, with no action required from the advisor or client.
“If you bought the ETF at $20 when it was offering 100% protection, and now it’s appreciated and valued at $25 at that new year state, the protection resets at that point,” Nelson explains. “And now your new baseline is that $25 amount with 100% protection and the new timeframe.”
The automatic reset feature simplifies portfolio management and eliminates the need for complex rebalancing strategies.
Tax Considerations
Beyond their protective features, the buffer ETFs may offer significant tax advantages over traditional fixed-income investments. The funds are structured to maximize tax efficiency. “All the bond distributions that you see, or even cash distributions from CDs, are going to be coming out at the ordinary income rate,” Nelson notes. In contrast, “If you held the ETF for a year and a day and sell it at a gain, that gain is taxed at 23.8%.” The tax advantage can be particularly meaningful for high-income clients.
Looking Ahead
For advisors seeking to provide clients with equity market exposure while maintaining strong downside protection, Innovator’s 100% Buffer ETFs represent a new solution that combines the benefits of protective strategies with the efficiency and transparency of the ETF wrapper. The products’ early success suggests they may become an increasingly important tool for advisors managing conservative allocations or helping clients transition from cash to market exposure.
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Additional Resources
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Disclosures
The Funds face 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 detailed list of fund risks see the prospectus.
There is no guarantee the Fund will be successful in providing the sought-after protection. If the Outcome Period has begun and the Underlying ETF has increased in value, any appreciation of the Fund by virtue of increases in the Underlying ETF since the commencement of the Outcome Period will not be protected by the Buffer, and an investor could experience losses until the Underlying ETF returns to the original price at the commencement of the Outcome Period.
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 funds’ 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 Fund’s 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.
These Funds are 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 ETFs are not expected to move directly in line with the Reference Asset during the interim period.
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. In a 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.
Investing involves risk. Principal loss is possible. All rights reserved. Innovator ETFs are distributed by Foreside Fund Services, LLC.
The Fund’s investment objectives, risks, charges and expenses should be considered carefully before investing. The prospectus and summary prospectus contain this and other important information, and it may be obtained at innovatoretfs.com. Read it carefully before investing.
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