ETF Veterans Start Funds That Seek to Hedge the Next Correction

(Bloomberg) -- Some investors worry that exchange-traded funds will be front and center in the next big stock market correction. So naturally, you can now buy ETFs aimed at protecting you from it.

Innovator Capital Management is readying three new funds that seek to shelter buyers from slumps of up to 30 percent in the S&P 500 Index, the company said in a statement Friday. The issuer was bought last year by Bruce Bond and John Southard, the co-founders of the PowerShares brand, which is now part of Invesco Ltd., the fourth-largest U.S. issuer of ETFs.

Amid some recent earnings disappointments and mounting pressures on the U.S. economy, that might sound appealing. But there’s a catch: If the S&P 500 goes up -- as it has for seven of the last 10 years -- the fund’s gains are capped.

“With the market having run up for as long as it has, providing some downside protection we thought was a timely idea,” Southard said.

The products are designed to give buyers a defined outcome over a set period of time, imitating strategies more commonly sold by insurers, like annuities, or packaged as structured notes. They aren’t, however, guaranteed like some of these products and will charge $7.90 for every $1,000 invested.

Multiple Hedges

Clearly, these aren’t toys for unsophisticated investors.

Each fund owns a basket of options on the S&P 500, with the price of those securities on day one used to determine the maximum gains that investors can pocket over the coming year. One of the funds offers protection against a 10 percent slump in the S&P, another hedges against a 15 percent dive, and another insulates investors from a 30 percent plunge -- although that ETF has to experience a 5 percent slide before the protection kicks in.

That’s if you invest immediately. Buy any of these funds after they’re issued, and the maximum gains and protection you can receive will reflect any intervening moves in U.S. stocks. Innovator plans to offer a tool on its website to help investors calculate their risk and return, and intends to issue similar funds for each quarter to simplify access for newcomers, Bond said.

The options basket for the three initial funds will reset around June 30 every year.

The funds are:

  • Innovator S&P 500 Buffer ETF (Ticker: BJUL)
  • Innovator S&P 500 Power Buffer ETF (Ticker: PJUL)
  • Innovator S&P 500 Ultra Buffer ETF (Ticker: UJUL)

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