Global Courant 2023-04-15 20:00:01
Investors may have a new way to generate income during economic downturns.
Innovator launched a unique line of barrier ETFs this month that offer protection by buying US Treasurys and selling stock options.
“Advisors are realizing that bonds are not the safe haven that many thought they would be,” the company’s CIO, Graham Day, told CNBC’s “ETF Edge” this week. “If you can pair (a barrier ETF) with the fixed income, it offers tremendous diversification benefits.”
Innovator, an results-based ETF issuer, launched these products last week: Premium Income 10 Barrier ETF, Premium Income 20 Barrier ETF, Premium Income 30 Barrier ETF, and Premium Income 40 Barrier ETF.
Day said these ETFs remove credit risk while providing day-to-day liquidity.
The funds protect against losses of up to 10%, 20%, 30% and 40% and offer income distribution rates of approximately 9%, 8%, 6% and 5%, respectively, according to the company’s website.
This means they will generate less income with the more protection they offer. If the fund’s underlying asset incurs losses above its stated performance level, Day claims that investors will still receive quarterly distribution payments – which are based on the premiums of the options sold.
Per Innovator data on defined outcome ETF industry growth, barrier and buffer ETFs have increased from three in August 2018 to 158 in March 2023, with assets under management increasing from $100,000 to approximately $21 billion.
Not just for the pros
Newcomers to the defined ETF space shouldn’t be put off by the granular protections the funds offer, said Todd Sohn of Strategas Securities.
“Don’t be too afraid of the word ‘option’,” said the company’s president. “If you’re a novice investor, understand they’re not doing anything crazy, right? If they were, I don’t think the products would accumulate too many assets.”
He thinks Innovator’s website does a “great job” of breaking it all down.
“I’d be curious to see ETFs continue to grow and the options markets on other funds get deeper as they add more suites,” Sohn added.
In a statement to CNBC, Sohn wrote that he is not a client of Innovator and is not currently using these ETFs. But he indicates that he could see them used in the future.
(TagsToTranslate)Exchange Traded Funds
