New ETF Says It Protects Against All Market Losses

Innovator ETFs, the pioneer of so-called buffer funds, launched a new product this week that it says is the first to protect investors against all market losses.

The Equity Defined Protection ETF – 2 YR TO JULY 2025 (TJUL) began trading Tuesday, bringing the investment characteristics of variable annuities to the ETF market. The issuer is seeking to provide investors who have accumulated cash over the pandemic years with a suitable investment vehicle, the company said. Buffer funds are also known as defined outcome ETFs.

TJUL uses options to track the performance of the SPDR S&P 500 ETF Trust (SPY) over an approximately two-year period starting July 18, 2023. The options strategy it uses offsets all losses the S&P 500 incurs over that time, while capping gains over that two-year period at 15.06% after the fund’s 0.79% annual fees.

Investors have been hesitant about getting into the market this year. According to data from Morningstar, money market funds—an investment equivalent to cash—saw $598 billion in inflows through the end of June, compared to $72.7 billion in outflows from U.S. stock funds over the same period.

Some of those money market flows come from investors moving money from savings accounts due to fear over this year’s regional banking crisis, but the concurrent outflows in stock funds shows that investors are tending toward safety.

“A lot of advisors have clients who won’t invest and instead hold cash or cashlike instruments because they’re too afraid of losses,” said Tim Urbanowicz, head of research and investment strategy at Innovator. He said TJUL’s goal is to help investors who are scared of losses to get exposure to at least some of the market’s gains, while protecting them from market drops.

Tax Treatment

The fund shares many characteristics with a variable annuity, a similar investment sold by banks and insurance companies that offers market returns up to a cap.

The 0.79% expense ratio for TJUL, while on the high end for ETFs, is much lower than the average of 2.3% for variable annuities, according to annuity.org. Another big advantage over traditional annuities is in taxes, FactSet Senior ETF Analyst Lois Gregson told etf.com.

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“I consider the biggest advantage the ETF offers is in the tax treatment,” she wrote in an email. “Income distributed from annuities or CDs would be taxed as such; TJUL is all capital gain (no distributions).”

While the fund protects against market losses, it doesn’t offer a guaranteed return like a Treasury bond might over the same period, so it isn’t a direct substitute for short- and ultra-short-term bond ETFs.

Nate Geraci of The ETF Store said in an email that the upside cap for TJUL “represents the absolute best an investor can do.”

“It’s obviously entirely possible the S&P 500 trends sideways or falls,” he wrote. “In those scenarios, an investor would have zero return from TJUL, not including fees.”

As investors can just purchase the ETF freely with their broker, rather than paying a commission, as is often the case with purchasing annuities, TJUL is an example of ETFs bringing price competition to an investment market. In addition, as the losses would fall on the party holding the other side of the options trade, not the issuer, like with annuities, less risk is involved.

Contact Gabe Alpert at [email protected]

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