Gloom has descended on Wall Street in recent weeks, with all major indices sliding steeply from their summertime highs. Fear is driving the markets now as traders fret over the coming of a potential recession and the impact of the Fed’s “higher-for-longer” rate policy on equity values. Now, investors who want to put a floor under their portfolio have a new buffered exchange-traded fund (ETF) to consider.
On Wednesday, November 1, Innovator ETFs launched The Innovator International Developed Power Buffer ETF on the New York Stock Exchange, Arca, under the ticker “INOV.”
The buffer fund delivers capped returns of the iShares MSCI EAFE ETF (EFA) and protects investors from the first 15 percent of downside losses over an annual period. The fund can be held indefinitely, resetting cyclically each year.
The target outcomes INOV aims for might only be realized if investors hold the stocks for the entire duration of the period. The fund makes no guarantee that said outcomes will be realized.
The EFA fund tracks over 800 large- and mid-cap companies in developed markets outside of North America. Issuer BlackRock says it gives investors “exposure to a broad range of companies in Europe, Australia, Asia, and the Far East.” Its top holdings – including Novo Nordisk, Nestle, ASML, Shell, LVMH, and Toyota – show the breadth of sectors it covers.
The BlackRock fund has around $45 billion in assets under management (AUM). A hypothetical investment of $10,000 ten years ago in EFA would today be worth just over $13,500. In 2023, EFA is up around 3.8 percent year-to-date.
Buffer Buffs
Buffer ETFs, also known as defined outcome ETFs, give market participants protection against volatility. Purchasing these funds there is a double-edged sword. Although they provide added security by limiting losses, they also suppress upside gains. They may be suitable for risk-averse investors who want shelter from extreme price swings.
Since launching their first buffer ETF in 2018, Innovator ETFs has been one of the pioneers in the space, along with First Trust, Allianz, and others. Innovator’s funds typically offer investors the choice of a nine, 15, or 30 percent buffer level before fees and expenses.
Innovator says it designs its buffered ETFs with the goal of “bringing more certainty to the financial planning process” and are “designed to keep you invested in the market.”
An extra perk: a recent tax adjustment that permits in-kind options trading now makes buffer funds as tax-efficient as traditional ETFs, per VettaFi.
“Many advisors have been successfully using buffer ETFs to limit the downside,” said VettaFi’s head of research, Todd Rosenbluth, of the new fund. “But these new ETFs will provide an income alternative to bond ETFs without credit or duration risk.”
INOV is currently swapping hands for around $25. It comes with an expense ratio of 0.85 percent.