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Two new ETFs aim to give investors a way to find positive returns even when the stock market declines, offering a new defensive tool for portfolios. On Tuesday, Innovator Capital Management is rolling out the Equity Dual Directional 15 Buffer ETF — July (DDFL) and Equity Dual Directional 10 Buffer ETF — July (DDTL). The funds are designed to deliver positive returns to investors in most market environments, including when the S & P 500 drops. In severe market downturns, the funds are expected to fall but still significantly outperform the index. The Innovator funds are an example of what is becoming a new wave of defined outcome funds. This category is largely made up of buffer funds, which surged in popularity after the stock and bond markets both declined in 2022. The new dual-directional funds keep the same basic derivatives strategy that allow other buffer funds to guard against a market downturn, but they also include an additional options layer that serves as a bet the market will fall, said Innovator chief investment officer Graham Day. “Whereas the buffers protected you — you wouldn’t make money in those negative markets, but you had this known level of protection — the dual directional allows you to make money in these negative markets, still have upside participation to the markets if it’s positive and then have that built in buffer against losses if the market’s losses are more extreme,” Day said. Here’s how the funds’ return profile is laid out in securities filings . For one, the funds will participate in market gains up to the upside cap, which will be different for each fund and every 12-month period. The fund will also deliver a positive return that is the inverse of market losses, up to the number on the fund’s label — 10% or 15%. If market losses exceed those thresholds at the end of the stated timeframe, those positive returns will quickly shrink and turn negative, but the underlying buffer would still help the fund outperform the broader market. The returns shown above do not include the 0.79% management fee for the funds. The “10” fund has an initial upside participation cap of 12.59%, while the “15” fund’s cap is 8.79%. The Innovator funds are built using customizable FLEX options, just like many buffer funds, and are built assuming an investor will hold them for 12 months. The products are designed to be bought on launch day and purchases and sales made in the interim period can lead to performance that differs from the stated goals. One important thing to note is that these funds will have lower upside caps than simple buffer funds with the same timeframe, Day said. “There’s no free lunch. What you’re giving up here is additional upside in positive markets to give you that dual-directional benefit in negative markets,” Day said. Innovator believes that investors will want use these funds in place of fixed income allocations to help offset losses elsewhere in the portfolio in the event of scenarios where both bonds and equities are declining, Day said. Innovator is not the only asset manager trying to offer a variation on buffer funds, with rivals experimenting with different time horizons and protection structures for their products. For example, last week ProShares launched buffer funds that reset on a daily basis .
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