A novel suite of ETFs may also help traders in financial downturns

Investors may have a new way to generate income during economic downturns.

Innovator this month launched a unique suite of barrier ETFs that offer protection by buying US Treasury bonds and selling stock options.

“Advisors are realizing that bonds are not the safe haven that many thought it was,” the company’s CIO Graham Day told CNBC’s ETF Edge this week. “If you can mate [a barrier ETF] along with fixed income, it offers a tremendous amount of diversification benefits.”

Innovator, an outcomes-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 eliminate credit risk while providing daily liquidity.

The funds protect against losses of up to 10%, 20%, 30% and 40% and offer yield payout rates of around 9%, 8%, 6% and 5%, respectively, according to the company’s website.

This means that the more protection they offer, the less income they earn. If the fund’s underlying asset suffers losses in excess of the specified performance level, Day investors will continue to receive quarterly distribution payments based on the premium of the options written.

Per Innovator data on industry growth of defined income ETFs, barrier and buffer ETFs have increased from three in August 2018 to 158 in March 2023, with assets under management growing from $100,000 to approximately $21 billion.

Not only for the professionals

Newcomers to the ETF space with defined outcomes shouldn’t be put off by the detailed protections the funds offer, said Todd Sohn of Strategas Securities.

“Don’t be afraid of the word ‘option,'” said the company’s CEO. “If you’re an inexperienced investor, you understand you’re not doing anything too crazy, right? If that were the case, I don’t think the products would garner too much fortune.”

He thinks Innovator’s website does a “great job” of breaking it all down.

“I’d be interested to see if ETFs continue to grow and options markets for other funds deepen as they add more suites,” Sohn added.

In a statement to CNBC, Sohn wrote that he is not a client of Innovator and does not currently use these ETFs. But he states he might see using them in the future.

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