![](https://cdn.prod.website-files.com/65bd07d8b327f687c05ebcec/662b61f5c838a2100252429b_174a33c6.png)
ETFs have grown to almost $12tn in AUM over the last 34 years, and total listed exchange traded products exceed 11,000 globally1. Active trading strategies have increasingly included ETFs with the top 100 products collectively trading $141bn/day2. While the SPY and QQQ dominate daily trading with 40% of the volume, leveraged ETFs, which accelerate risk, are trading $19bn/day, which is almost half of the daily volume in fixed income and sector ETF trading combined3. Investors are increasingly expressing, and enhancing, their risk exposures using ETFs.
As we have written, we believe the risk-management segment of the ETF market is set to accelerate rapidly as investors make use of exposure management through ETFs. Working with our partner Innovator, we have analyzed long and short-term investment and trading strategies with Innovator Buffer ETFs.
For active traders, Buffer ETFs (“Buffers”) have several use cases that may improve portfolio construction, reduce certain risks, and change the convexity4 of existing portfolios. Portfolio managers implementing buffer strategies manually may find that the options strategies can be time intensive and include market frictional costs. As one of our institutional relationships commented after digging into Buffers, “if we did this ourselves, we’d get the wrong options prices and trade the individual legs at the wrong time.” With transparent, underlying options strategies around reference assets like the SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust (QQQ), [market frictional costs, Buffer ETFs can assist in resolving these challenges.
Buffers provide another potential tool for portfolio managers implementing Delta5 exposure optimization around the monthly, quarterly, or annual series of the products. Deltas of the Buffer ETFs’ underlying options change as the reference assets move within the range between the issue price and the floor and cap levels. As the Buffer series time period approaches its end, Gamma6 can become more impactful.
In addition to the Buffer that can reduce equity factor risk while retaining upside (subject to a “cap”), Buffers can also impact portfolio market factor exposures. For example, we observe that being long certain Buffer ETFs that have the IWM as a reference asset can at times reduce an overall portfolio momentum factor7 bias derived from long positions leveraged to that factor. We will post another essay on the use of Buffers to reduce reversal risk, as the breadth of Innovator’s Buffer ETF suite may, from time to time, allow for the creation of interesting asymmetric exposure to below-trend markets and assets (including the iShares MSCI EM ETF and the iShares MSCI EAFE ETF).
![](https://cdn.prod.website-files.com/65bd07d8b327f687c05ebcec/664651b3623775d859099c5f_64eb87d7.png)
Trading volume for Buffers has grown as more investors allocate to these series at inception and over time. As risk-savvy financial advisors have been adopting these instruments for their retail customers and often treating the Buffers as a long-term part of their client risk mitigation strategies, volume around the rebalance date has increased over the short time since Buffers were introduced to the market. The January Buffer ETF referenced to the SPY (Ticker: PJAN) traded about $150m on the January 2, 2024 series pricing day, up from an initial $15m at the launch of the product on January 3, 20198.
If the current trend persists, volumes could continue to expand, potentially increasing the sophistication of trading strategies around this nascent ETF Technology.
In summary, active traders implementing indexed and leveraged ETFs into their trading strategies may find that Buffer ETFs present another tool for portfolio construction. We would be pleased to answer any questions about how Buffer ETFs fit into portfolio strategies. Please feel free to contact us here, and a Kiski analyst will provide you with more information and insight.
2 Data: VettaFi.com; Calculation: Kiski. Average daily 3 month trading volumes as of 4/16/24.
3 Data: VettaFi.com; Calculation: Kiski. Average daily 3 month trading volumes as of 4/16/24.
4 Convexity references a non-linear relationship between an instrument and its underlying.
5 Delta is a measure of the sensitivity of an option’s price to a change in the price of the option's underlying asset.
6 Gamma is a measure of the anticipated increase or decrease of an option’s Delta resulting from a $1 movement in the price of the option’s underlying asset.
7 Portfolio momentum factor bias is the calculated regression of an entire portfolio’s positions to the Momentum Factor, which measures the price change of top performing stocks minus the price change of bottom performing stocks over a one-year lookback period. See: https://www.msci.com/eqb/methodology/meth_docs/MSCI_Momentum_Indexes_Methodology_May2017.pdf
8 Data: S&P reported trading volume; Calculation: Kiski.
The Funds have characteristics unlike many other traditional investment products and may not be suitable for all investors. For more information regarding whether an investment in the Fund is right for you, please see “Investor Suitability” in the prospectus.
The Funds face numerous market trading risks, including active markets risk, authorized participation concentration risk, buffered loss risk, cap change risk, capped upside return risk, correlation risk, liquidity risk, management risk, market maker risk, market risk, non-diversification risk, operation risk, options risk, trading issues risk, upside participation risk and valuation risk. For a detail list of fund risks see the prospectus.
FLEX Options Risk The Fund will utilize FLEX Options issued and guaranteed for settlement by the Options Clearing Corporation (OCC). In the unlikely event that the OCC becomes insolvent or is otherwise unable to meet its settlement obligations, the Fund could suffer significant losses. Additionally, FLEX Options may be less liquid than standard options. In a less liquid market for the FLEX Options, the Fund may have difficulty closing out certain FLEX Options positions at desired times and prices. The values of FLEX Options do not increase or decrease at the same rate as the Reference Asset and may vary due to factors other than the price of the Reference Asset.
These Funds are designed to provide point-to-point exposure to the price return of the Reference Asset via a basket of Flex Options. As a result, the ETFs are not expected to move directly in line with the Reference Asset during the interim period.
Investors purchasing shares after an outcome period has begun may experience very different results than fund’s investment objective. Initial outcome periods are approximately 1-year beginning on the fund’s inception date. Following the initial outcome period, each subsequent outcome period will begin on the first day of the month the fund was incepted. After the conclusion of an outcome period, another will begin.
Fund shareholders are subject to an upside return cap (the “Cap”) that represents the maximum percentage return an investor can achieve from an investment in the funds for the Outcome Period, before fees and expenses. If the Outcome Period has begun and the Fund has increased in value to a level near to the Cap, an investor purchasing at that price has little or no ability to achieve gains but remains vulnerable to downside risks. Additionally, the Cap may rise or fall from one Outcome Period to the next. The Cap, and the Fund’s position relative to it, should be considered before investing in the Fund. The Fund’s website, www.innovatoretfs.com, provides important Fund information as well information relating to the potential outcomes of an investment in a Fund on a daily basis.
The Funds only seek to provide shareholders that hold shares for the entire Outcome Period with their respective buffer level against losses of the Reference Asset during the Outcome Period. You will bear all Reference Asset losses exceeding the buffer. Depending upon market conditions at the time of purchase, a shareholder that purchases shares after the Outcome Period has begun may also lose their entire investment. For instance, if the Outcome Period has begun and the Fund has decreased in value beyond the pre-determined buffer, an investor purchasing shares at that price may not benefit from the buffer. Similarly, if the Outcome Period has begun and the Fund has increased in value, an investor purchasing shares at that price may not benefit from the buffer until the Fund’s value has decreased to its value at the commencement of the Outcome Period.
The following marks: Accelerated ETFs®, Accelerated Plus ETF®, Accelerated Return ETFs®, Barrier ETF™, Buffer ETF™, Defined Outcome Bond ETF®, Defined Outcome ETFs™, Defined Protection ETF™, Define Your Future®, Enhanced ETF™, Floor ETF®, Innovator ETFs®, Leading The Defined Outcome ETF Revolution™, Managed Buffer ETFs®, Managed Outcome ETFs®, Step-Up™, Step-Up ETFs™, Target Protection ETF™ and all related names, logos, product and service names, designs, and slogans are the trademarks of Innovator Capital Management, LLC, its affiliates or licensors. Use of these terms is strictly prohibited without proper written authorization.
Innovator ETFs are distributed by Foreside Fund Services, LLC (“Foreside”). Kiski Group Inc. (“Kiski”) is not affiliated with Foreside or Innovator ETFs. Innovator ETFs is not affiliated with Kiski or Foreside. Innovator ETFs are not sponsored, issued, or sold by Kiski.
The Fund’s investment objectives, risks, charges and expenses should be considered carefully before investing. The prospectus and summary prospectus contain this and other important information, and it may be obtained at innovatoretfs.com. Read it carefully before investing.