In This Article:
Key Takeaways
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After record $207 billion of net inflows in 2021, fixed income ETFs have incurred net redemptions in January as investors reposition portfolios ahead of likely rate hikes.
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We think defined outcome ETFs can be a complement to the fixed income portion of a portfolio, providing downside protection through limited volatility and modest upside potential in a finite time period.
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For example, the Innovator U.S. Equity Ultra Buffer ETF - January (UJAN) and the Innovator Defined Wealth Shield ETF (BALT) have lower betas and standard deviations than popular fixed income ETFs, and these features helped protect against recent losses.
Fundamental Context
Investors are not rotating into fixed income ETFs even as stock market volatility picks up. The S&P 500 Index declined 8% year-to-date through Jan. 21, but fixed income ETFs incurred outflows on the heels of a record-breaking year.
Concerns about the Federal Reserve hiking interest rates multiple times in 2022 have contributed to the iShares 20+ Year Treasury ETF (TLT) and the iShares iBoxx USD Investment Grade Corporate Bond ETF (LQD) suffering redemptions of $3.0 billion and $1.8 billion, respectively, to start the new year.
TLT's average duration of 19 years and LQD's 9.5 years make them less able to withstand the potential negative impact of rising interest rates. While investors have turned to other less sensitive fixed income ETFs, they likely are still looking for alternatives that can counterbalance the downside of investing in a fund with traditional S&P 500 exposure.
Defined outcome ETFs provide downside protection with some upside potential using Flexible Exchange (FLEX) options on the SPDR S&P 500 ETF Trust (SPY). In August 2018, Innovator ETFs launched the first suite of S&P 500 Index-based "buffer ETFs," which were designed to provide broad market exposure for a finite period of time but with downside protection in exchange for capped exposure to the upside.
Innovator ETFs offers three versions of the ETFs in this initial series—one with 9% protection, one with 15% protection and one with 30% protection—to appeal to investors with different risk profiles.
Since the summer of 2018, other asset managers—including Allianz, First Trust, Pacer and TrueShares—launched their own suites of products. Innovator ETFs ultimately launched S&P 500 Index-focused ETFs with 12-month outcome periods for each month throughout the calendar year. The January series includes UJAN, which has downside protection up to 30% for 2022 but has capped upside of 6.89%.