In An Uncertain Stock Market Environment, A 'Buffer' ETF Offers 100% Downside Protection, With Capped Gains

Investors have traditionally employed strategies such as hedging and implementing stop losses to protect themselves against downside risk in the stock market.

Innovator Capital Management, an ETF issuer, provides an alternative option for investors, by offering a series of “buffer ETFs” that offers downside protection by limiting losses, according to Bloomberg.

On Tuesday, the company’s newest ETF, the Innovator Equity Defined Protection ETF TJUL began trading. The fund, which tracks S&P 500 returns with a 100% downside buffer over a two-year outcome period, has an upside cap of 16.62%.

Buffer ETFs, also referred to as defined-outcome ETFs, provide safeguarding against drawdowns for a specified period through the utilization of options that secure an investment's outcome. In exchange for capping certain gains, they absorb a portion of potential stock market losses.

It's important to note that buffered ETFs don't possess any tangible stocks or bonds; instead, they rely on options to mirror the performance of an index.

“If we look at the insurance and structured-note world, we find that there is far more demand for products that give you some equity upside, but with 100% downside protection built into the products,” Graham Day, chief investment officer at Innovator told the outlet. “That’s what we are going after with this Defined Protection ETF — to, for the first time ever, give investors access to the equity markets, but with a 100% buffer built into the product.”

Trading the upside in volatility is another way traders can protect themselves from market downturns. Traders wishing to trade the volatility in the stock market can use MIAX’s SPIKES Volatility products. The products, which are traded on SPIKES Volatility Index SPIKE, track expected volatility in the SPDR S&P 500 over the next 30 days.

Read Next: This Exchange Has Gained A 16.24% Foothold In Just A Matter Of Years, Disrupting The Industry - How To Trade Some Of The Most Cutting Edge Volatility Products On The Market

Photo: Shutterstock