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Innovator Funds - Investor Guide 2020

The Blue Water Team

Innovator Funds, the leader in defined outcome funds, walks investors through their innovative "buffer" funds and explains how they work. They list their funds along with their expense ratio, starting cap, starting buffer, and outcome period.

So what are defined outcome / buffer funds?  They are ETFs that provide investors with stock market appreciation, up to a certain cap, and consistent downside buffer levels over a specified period, hence the name - defined outcome.  

Innovator’s Defined Outcome ETFs offer market exposure to the S&P 500, Nasdaq 100, Russell 2000, MSCI EAFE, and MSCI Emerging Markets indices.  All but the S&P 500 starts with a 15% downside buffer.  The S&P 500 is offered with downside buffers of 9%, 15%, and 30%.  Each fund also has an annual upside cap to their performance and this varies by fund.   All funds have an outcome period of 1 year.  At that point, they reset to their designated downside buffer and are assigned a new upside cap for the new year.

Let’s look at the S&P 500 buffer funds for January 2020.

Fund Name

Ticker

Starting Buffer

Starting Cap

Buffer - January

BJAN

9%

13.3%

Power Buffer - January

PJAN

15%

8.5%

Ultra Buffer - January

UJAN

30% (after 1st 5%)

7.7%

BJAN buffers the first 9% of losses if held over the entire outcome period and allows investors to make up to 13.3% before fees and expenses.  PJAN offers a higher buffer, but a lower cap.  With UJAN, the Ultra Buffer, the investor absorbs the first 5% of losses and the fund absorbs the next 30%.

Let’s look at the S&P 500 buffer funds for March 2020.  You’ll notice that the buffers stay the same, but the caps have increased since January.   That is due to the stock market decline from COVID-19.

Fund Name

Ticker

Starting Buffer

Starting Cap

Buffer - March

BMAR

9%

16.1%

Power Buffer - March

PMAR

15%

11.0%

Ultra Buffer - March

UMAR

30% (after 1st 5%)

8.0%

Innovator accomplishes these defined outcomes with a portfolio of exchange-traded Flexible Exchange Options (FLEX Options) based on the indices above.  The expense ratios of the funds range from 0.79% to 0.89%.  While more costly than traditional index funds, the extra cost is for the “insurance” of the downside buffer.

Blue Water uses Innovator’s Defined Outcome ETFs primarily for clients who are risk averse, but need some stock market exposure in order to reach their goals.  They can also be used to position the portfolio more defensively while still maintaining a moderate amount of stock exposure.  With the ETFs Innovator Funds has available, we can use buffer funds within asset classes like US Large Caps, US Small Caps, International Large Caps, and Emerging Markets.