The US outcome defined ETF provider is targeting risk-averse investors with a replacement for short-term bond exposure.

US defined outcome exchange-traded funds (ETFs) provider Innovator has launched the Innovator Defined Wealth Shield ETF, a first in the structured products market designed as a replacement for bond exposure - in particular, short-term bond exposure, which will  not provide the typical fixed income equated with bonds. 

“Inflation concerns are at all-time highs as is duration risk, so you're not being compensated adequately for the amount of risk that you need to take in bonds right now,” said John Southard (pictured), co-founder and chief investment officer at Innovator.

Advisers are looking for potential alternatives to their bond allocations - John Southard

The new structured ETF is listed on the Cboe under the ticker BALT is different from most existing defined outcome ETFs in that it is track the performance of the SPDR S&P500 ETF Trust (SPY) as opposed to the S&P 500 index.

BALT will reset quarterly (the first reset will be 30 September), offers a pre-expenses upside cap of 0.70%, and is designed to protect against the first 20% of downside performance.

According to Southard, the new product seeks to deliver a defensive investment strategy as an alternative to cash, short-term debt, and core bond strategies that are common in traditional portfolios.

A driving force for the ETF was the low interest rate environment which has forced investors, advisers, and firms alike to think outside the box to attain yield.

“Advisers are looking for potential alternatives to their bond allocations along with new solutions that may diversify the return sources within the defensive portions of their portfolios while maintaining risk management features,” said Southard.

The firm has had a positive run during the first half of 2021 with a positive product uptake despite the challenges around adoption as it approaches the three-year anniversary of its S&P500 buffered ETF debut.

“I think advisers are obviously trying to understand what defined outcome products are, how they work. Therefore, there's been a fairly rapid acceptance of them, however, the approval of such products on all systems are a challenge for the independent advisers,” Southard said.

Innovator has been at the forefront of developments in the defined outcome space – the firm recently added to its suite a range of ‘accelerated ETFs’, which are the world’s first products to offer a multiple (2x or 3x) of the upside return of a reference asset (SPY or Invesco QQQ), up to a cap, with limited exposure on the downside.