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New ETF Provides Full Downside Protection for Patient Investors

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The Innovator Equity Defined Protection ETF Offers Downside Protection for Investors


The Innovator Equity Defined Protection ETF (TJUL) is the latest addition to the growing world of buffer funds, providing investors with 100% downside protection over a two-year period. This fund, part of the defined outcome suite from Innovator, offers capped upside participation of approximately 16.6%. Buffer funds have remained popular among investors in 2023, despite the stock market rally. Many investors are still cautious and prefer lower-risk investments like money market funds. With the Innovator Equity Defined Protection ETF, investors who are hesitant to invest due to volatility or short-term drawdowns can gain exposure to the market.

The Strategy Behind the Fund

The Innovator Equity Defined Protection ETF utilizes a three-pronged options strategy using flex options. The strategy involves buying a call option on the SPDR S&P 500 ETF Trust (SPY) that has a strike price below the current market level, providing upside participation. Additionally, Innovator purchases a put option for downside protection, with a call option sold at a strike price above current market levels to offset the price of the other two options. However, the second call option does limit the potential upside. The fund's total return, accounting for fees and fund costs, may still be slightly negative. The annual expense ratio for the Equity Defined Protection ETF is 0.79%.

Important Considerations for Investors

Timing plays a crucial role in the Innovator Equity Defined Protection ETF. The downside protection and upside cap are relative to when the fund was established. If the market experiences a 10% rise over the next month, an investor who buys into the fund at that point will have reduced potential upside and limited downside protection. It is essential for investors to pay attention to the remaining cap when considering this fund. The two-year time period is another key consideration, as the fund holds derivatives that may not track the SPY perfectly when options are still far from expiration. Investors may need to wait until mid-2025 to capture their full upside.

Competing Securities and Tax Efficiency

2-year U.S. Treasury notes provide an alternative investment option for those seeking safe returns. With a yield of over 4.7%, these notes offer an opportunity to lock in more than half of TJUL's potential upside over the same time frame. Additionally, the Innovator Equity Defined Protection ETF does not pay out dividends or coupons, making it more suitable for investors who do not require immediate cash and want to limit their tax liability. The tax treatment of different strategies is often overlooked but is an important factor to consider when evaluating investment options.

"Hot Take" Conclusion: How This Topic May Impact a New Business

The Innovator Equity Defined Protection ETF presents an interesting opportunity for new businesses that are navigating the world of investment. In an increasingly uncertain market, where volatility and short-term drawdowns can be a deterrent for investors, this buffer fund provides a solution for businesses seeking to attract risk-averse investors.

For new businesses looking to raise capital, the Innovator Equity Defined Protection ETF offers a way to tap into the investor market without the fear of significant downside risk. By providing 100% downside protection over a two-year period, this fund can instill confidence in potential investors. It also allows businesses to showcase their growth potential while assuring investors that their capital will be safeguarded.

Additionally, the tax efficiency of the Innovator Equity Defined Protection ETF can be advantageous for new businesses. By not paying out dividends or coupons, this fund may be more appealing to investors, especially those with a longer investment horizon. The ability to limit tax liability can make investing in such a fund more attractive, potentially drawing more capital towards new businesses.

However, it is crucial for new businesses to navigate the timing considerations associated with this fund. Understanding that the downside protection and upside cap are relative to when the fund was established can influence the decision-making process. New businesses should carefully evaluate the market conditions and determine the ideal timing for participating in this fund to maximize potential upside.

In conclusion, the Innovator Equity Defined Protection ETF can have a positive impact on new businesses by providing a safer investment option for risk-averse investors. This fund's downside protection, defined outcome structure, and tax efficiency make it an attractive choice for businesses seeking to attract capital and build investor confidence in an uncertain market.

Article First Published at: https://www.cnbc.com/2023/07/19/this-new-etf-offers-100percent-downside-protection-for-patient-investors.html

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