Risk-managed ETFs are at the beginning of the same growth trajectory experienced by index ETFs over the last 40 years. According to Morgan Stanley’s global head of ETFs, “Over 75% of all ETF launches in 2023 were active. I think most notably within the active ETF space are portfolios that have options-embedded strategies within the portfolio.”

Over the next several months, we will be exploring the institutional use cases for one segment of the risk-managed ETF market: Buffer ETFs. Innovator ETFs is the issuer behind the largest lineup of Buffer ETFs (“Buffers”) and has partnered with Kiski to create analytics on their Buffer products. These products provide institutional investors —hedge funds, long-only funds, large family offices, and pension funds— with insight into Buffer ETFs and their role in trading and allocation strategies.

Buffer ETFs are designed to embed options strategies around index exposure to create targeted upside and downside exposures. The exposures can be actively managed by a sub-advisor to pursue targeted mandates. Buffers are issued in series that have a set term (usually annually or quarterly) at the end of which the series is repriced while the ticker and structure is maintained.

Kiski has found that the breadth and depth of the Innovator buffer products create a significant toolkit for institutional portfolio risk management and targeted factor exposure creation. A current common structure is:

• Reference asset based on a liquid index, such as the SPDR S&P 500 ETF Trust (SPY) or Invesco QQQ Trust (QQQ)
• Cap structure that provides long exposure up to a cap level (e.g., 15% over 12 months)
• Put structure designed to protect investors from targeted downside from the issue price (e.g., 15%)

Innovator, as well as others in the industry, are creating new applications of the risk-management approach to ETF issuance.
Kiski has worked with institutions over the past six months to gather initial impressions of the Buffer structure and to design quantitative methods to incorporate them into sophisticated portfolios. While a typical initial reaction is “the product is simple,” once an investor explores the pricing dynamics, structure (“Flex options”), transparency, and liquidity features of the products, the next reaction generally is “how can I use these in my portfolio?”

Aside from the scale benefits that Innovator can achieve in pricing and active management of structure positions, Buffers have potential application to lend themselves to both static and active allocations within an institutional portfolio. Each issued series begins with a set of analyzable Greeks that evolve over time, as does any options-based strategy. However, interesting Delta¹ and Gamma² behavior may create convexities³ that allow for calibration of total portfolio Deltas that include hedging and market reversal capture strategies.

As an example of static allocation benefits, in a future essay we will be comparing institutional allocations to hedge fund exposure versus a combination of Buffer ETFs. We will review potential performance outcomes in different market environments while addressing fee and liquidity differences. Because Innovator releases multiple series (both periodicity and reference asset), astute institutional allocators can pursue alpha within a portfolio of Buffers by rotating exposures among the Innovator toolkits.

For many hedge funds, the difficulty of single security shorting has resulted in the strategy being reduced in some cases. Certain managers are having more success identifying their best allocation opportunities and hedging the market risk from those allocations through factor-based baskets of securities designed and sold by investment banks at sizable margins.  ETFs offer liquidity and transparency to markets, allowing managers to incorporate a risk-based approach to portfolio construction and hedging without being beholden to one counterparty.

As a sign of the growth to come, BlackRock issued its first buffer ETF product in June 2023, five years after Innovator debuted their product. Institutional investors should investigate Buffer products to familiarize themselves with the current innovation curve.
Over the next several months, we will publish a series of articles describing specific use cases for Innovator Buffer ETFs. The Kiski Platform Solutions team are able to provide interested parties with informative analytics on the impact of Buffer ETFs within portfolios and are available to further describe their specific applications to portfolios.

¹ Delta is a measure of the sensitivity of an option’s price to a change in the price of the option's underlying asset.

² 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.

³ Convexity references a non-linear relationship between an instrument and its underlying asset.

‍^{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 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.}