Worried about a bubble? Innovator capital has 160 ETFs designed to let you ride the bull market with your seat belt securely fastened.
The stock market has been on a feverish tear. A $100,000 investment in the S&P 500 in 2009, immediately after the financial crisis, would be worth more than $1 million today. But as the bull market continues to charge, plenty of people are worried about a crash. According to the St. Louis Federal Reserve, a record $7.5 trillion is sitting on the sidelines in money market funds, up 57% from $4.8 trillion five years ago.
Bruce Bond and John Southard of Wheaton, Illinois–based Innovator Capital Management have a remedy for scaredy-cat investors. Their $28 billion (assets) Innovator Fund specializes in bubble-protection ETFs, technically known among advisors as defined-outcome funds. They use options contracts to hedge against losses, which also limits upside returns, but it might be worth it for peace of mind. Innovator’s most popular funds are its U.S. Equity Power Buffer ETFs, which protect investors from the first 15% of the S&P 500 losses in a year, and currently offer an upside return of up to 13%.
Assets under management have exploded for Innovator since its first fund was introduced in 2018, even though it has been underperforming the indexes it tracks and has expenses 26 times higher than Vanguard and BlackRock S&P 500 ETFs. Moreover, investment gurus like billionaire quant Cliff Asness suggest that investors can simulate the downside protection of buffer ETFs more economically by allocating, say, 30% to Treasurys and 70% to stocks.
Bond, 62, Innovator’s CEO, says Asness’ research misses the point, particularly while anxious investors stay out of the stock market entirely.
“If you’re going bowling, and that bowling ball represents your nest egg, wouldn’t you want to put the bumpers up, just to make sure?” he asks with a pronounced Louisiana drawl, even though he has lived in the Chicago suburbs for decades. “You may only hit three or four pins, but you know it’s going to hit some pins, versus the potential to fly off into the gutter.”
Innovator’s popular U.S. Equity Power Buffer ETFs, which have $10 billion under management, are issued every month with tickers such as PJAN, PFEB and PMAR. They shield investors from up to 15% of losses in the S&P 500 Index over 12 months. Each fund’s portfolio rolls into a new set of options contracts when the one-year period ends.
Here’s how they work: Each month, Innovator buys a put option at the S&P 500 Index’s existing price and sells a put option 15% below that price, set to expire in a year. Then it sells a call option as far out of the money as possible to offset the cost of paying for the buffer, creating the upside cap. This cap varies each month depending on the cost of the options. (Put options give investors the right to sell a security at a specified price; call options afford the right to buy.)
For example, PJAN, the 15% buffer ETF covering each calendar year, has a 12% cap in 2025, meaning investors are underperforming the index’s 14.5% year-to-date gain and won’t benefit from any further gains the rest of the year. In 2024, its 13.5% return wound up below the index’s 23% gain, and in 2023 its 18% return trailed the market’s 24.3% gain. But in 2022, when the market lost around 20%, PJAN lost only 5%.
Add it all up, and the fund’s annualized return since inception at the beginning of 2019 is 9.3%—well behind the S&P 500’s 15.6% growth rate, but if the roaring bull market ever reverses course, the fund’s investors would be cushioned from the blow.
Innovator offers a similar suite of products with a 9% buffer and a higher upside cap, or a 30% buffer with lower caps, or even a 100% buffer—launched in July 2023, these funds are capped at around 7% for this year. In addition to the S&P 500, Innovator has a menu of buffers tracking the Nasdaq 100 and Russell 2000, plus international developed and emerging markets indexes as well. The funds are expensive, with expense ratios between 0.79% and 0.89%.
“The products are set up for people who are in retirement or near retirement, and they don’t need to double their money. They need to protect their money, and they need to live off their money,” says Southard, 56, Innovator’s president. “At all-time highs, candidly, is one of the better times to buy the product, to add in that downside protection.”
Innovator isn’t Bond and Southard’s first act in ETFs. The duo originally met working together at First Trust in the 1990s before Bond left to run product marketing at Nuveen. The $1.4 trillion asset manager was making plans to build out an ETF business but scrapped it, so Bond, thinking ETFs were going to be an “absolute home run,” offered to buy out the work they’d done and launch it himself. He recruited Southard, who brought more of a research background to pair with his marketing savvy, to start PowerShares Capital Management in 2002.
Within four years, PowerShares launched 36 ETFs and amassed $3.5 billion in assets in funds packaging niche corners of the market such as clean energy stocks and water treatment firms. In 2006, they sold the business to Amvescap, the firm now called Invesco, for $60 million upfront plus earn-out, ultimately bringing the price to $260 million.
Bond and Southard continued building Powershares under Invesco, but both left in 2011. Southard began a real estate investing firm, while Bond devoted his time to hunting and fishing. Then a call from Southard in late 2015 got Bond to hang up his rod and reel: Southard had purchased a downside protection-oriented structured insurance product from his financial advisor.
“[Southard] said, ‘It’s really amazing there isn’t something like this available in an ETF,’” Bond says.
In 2017, the pair bought Innovator Management for a small sum since it already managed the Innovator IBD 50 ETF, tracking Investor’s Business Daily’s index of 50 top growth stocks. Acquiring an existing firm allowed them to skip over the regulatory headaches and costs of starting a fund company. Within a year Innovator listed the world’s first buffer ETFs.
Innovator has inspired a slew of copycats like First Trust and Allianz, and the buffer industry now has $75 billion in assets under management. Defined outcome strategies have seen $10.8 billion in inflows just this year, with Innovator and First Trust both claiming more than $4 billion.
For investors who are even more pessimistic, Innovator’s latest launch is a group of “dual directional” ETFs, which use additional options contracts to produce positive returns for investors when the market declines. For the Equity Dual Directional 15 Buffer ETF that launched in July (DDFL), this means that if the S&P 500 declines up to 15%, investors could enjoy a positive 15% return instead of zero, though the upside if stocks rise is capped at 8.8%.
Bond has no shortage of ideas for expansion, but he’s also shopping his eight-year-old company, and a deal could be imminent. Forbes estimates that the bubble protection ETF operation could fetch as much as $2 billion—proving that when it comes to selling sleep-well-at-night products to investors, real innovators like Bond and Southard always profit most.