Investors may have a new way to generate income during economic declines.
Innovator launched a one-of-a-kind suite of barrier ETFs this month that provides protection by purchasing U.S. Treasurys and selling equity options.
“Advisors are realizing that bonds aren’t the safe haven that many thought they would be,” the firm’s CIO, Graham Day, told CNBC’s “ETF Edge” this week. “If you can pair [a barrier ETF] with the fixed income, it offers a tremendous amount of diversification benefits.”
Innovator, an outcome-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 daily liquidity.
Protecting against losses up to 10%, 20%, 30% and 40%, the funds provide income distribution rates at around 9%, 8%, 6% and 5%, respectively, according to the company’s website.
This means they’ll produce less income with the more protection they provide. If the fund’s underlying asset experiences losses beyond its set performance level, Day contends investors will still receive quarterly distribution payments — which are based on the premiums of the sold options.
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 rising from $100,000 to about $21 billion.
Newcomers in the defined outcome ETF space should not be deterred by the detailed protection the funds offer, said Todd Sohn of Strategas Securities.
“Don’t get too scared of the word ‘option,'” the firm’s managing director said. “If you’re a novice investor, understand that they’re not doing anything too crazy, right? If that was the case, I don’t think the products would be gathering assets too much.”
He finds Innovator’s website does a “great job” of breaking everything down.
“I’d be curious as ETFs continue to grow and the options markets on other funds deepens if they’ll add more suites out there,” Sohn added.
In a statement to CNBC, Sohn wrote he’s not a client of Innovator and doesn’t use these ETFs right now. But he indicates he could see using them in the future.