Innovator Funds is an issuer best known for creating the Defined Outcome ETF and bringing derivatives-based downside protection to retail investors. To date, its products have focused on broad market indexes such as the S&P 500, the Nasdaq 100 and MSCi EAFE, among others. Earlier this month Innovator launched a new fund that, while still focused on the broad equity exposure, does more than synthetically create positions and then hedge them.
Recently, Innovator has partnered with Parametric Portfolio Associates. The latter firm was founded in the late 1980s and has been using its highly quantitative approach to security analysis and selection to gain not just the interest of investors as gauged by its reported $366 billion of assets under management, but also the interest of various partners over the years, including Pacific Life, Eaton Vance and Morgan Stanley (MS) . Parametric has made a name for itself as one of the earliest providers of what has been dubbed as Direct Indexing Solutions -- essentially, a variation of index investing without using any kind of structure such as a mutual fund or exchange traded fund.
The Innovator Equity Managed Floor ETF (SFLR) was launched Nov. 9 and has an 89-basis-point expense ratio, meaning a shareholder with $1,000 invested over a calendar year would pay $8.90 in fees over that period.
As mentioned earlier, this fund is a slight departure from the rest of Innovator's fund lineup for a few reasons. The primary reason is that it is not a defined outcome type product; also, its holdings include not just options but also equity securities. If anything, this is the most vanilla product it has launched.
The portfolio consists of about 250 equity positions selected by Parametric and employs a defensive, laddered option overlay strategy. The defensive part is that the option positions establish a 10% downside floor on the portfolio and the overlay is considered laddered because the hedge is established for a number of separate expiration dates in the future.
The hedges are established by selling shorter-term calls and using those proceeds to help finance the puts. Interestingly, the sold calls use the S&P 500 Index (SPX) as the underlying and the bought puts use the SPDR S&P 500 ETF (SPY) as the contract underlying. The current portfolio's hedge includes SPY puts expiring on the next four quarter-end periods (December 2022 and March, June and September 2023).
My take
Regular readers know I'm a fan of innovator's existing products. Given the environment we are in where markets are meting out severe punishments for companies that disappoint, my take is that we are heading into a regime of active management being in the spotlight. Partnering with a firm such as Parametric is a smart move anyway, but doing so now makes even more sense because I'm not sure the timing could be any better. Smart active management with downside protection is worth at least a spot on the watchlist in my book.
