Innovator Defined Outcome ETFs - Overview And Analysis

May 07, 2021 7:01 AM ETXBAP, UAPR, BAPR, PAPR23 Comments14 Likes


  • For retirees, capital preservation is paramount.
  • Innovator Defined Outcome ETFs are effective at preserving investor capital and suffer fewer losses during downturns.
  • An overview of these funds follows.
  • This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »
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Innovator ETFs has developed a suite of defined outcome ETFs. These funds provide investors with exposure to most major stock market indexes, subject to caps, buffers, and different leverage ratios. Most seek to provide investors with lower losses during downturns, at the expense of lower gains during bull markets. This is a reasonable tradeoff, and seems particularly appropriate for retirees, for whom capital preservation is paramount. More aggressive, bullish investors should consider other options, as most of these funds don't offer the possibility of substantial gains.

Of all 64 Innovator ETFs, a set offering investors leveraged, but capped, upside with reduced downside seems particularly enticing. These are as follows:

(Source: Innovator ETFs)

Innovator ETFs has a thorough website with all the information investors might need. This includes:

  • ETF product table, which summarizes the company's ETFs
  • Education Center, which explains how the products work, and what investors can expect of these
  • Pricing tool, with detailed information for each ETF, including its exact downside and upside potential under current market conditions
  • Previous outcome tool, which tells you how each ETF performed under previous years / market conditions

As I said, I think the information provided by Innovator ETFs to be quite thorough. I'll be explaining how these funds work in my own words, but investors should have a look through management's own articles and infographics. I'll be focusing on the U.S. Equity Accelerated 9 Buffer ETF (XBAP) specifically, as I think it is a particularly strong fund, although most of the information provided here applies to most of the company's funds.

Innovator ETFs - How do they Work

Innovator ETFs provide exposure to a particular market index, with up to four key differences to an index fund of the same:

  • Downside is reduced, through a buffer reducing losses up to a point.
  • Upside is capped, through a cap limiting possible gains.
  • Upside is leveraged, so returns are a multiple of underlying index returns.
  • Outcome periods are clearly defined, so returns have to be analyzed for a specific time period. Usually a year.

The above is achieved using options. In simple terms, the fund enters into contracts with different counterparties which, when taken together, have the effect of reducing downside, capping upside, and leveraging returns to the specifications provided.

Different funds have different specifications. Some reduce downside slightly, others moderately, and some greatly. Same with the other three characteristics. For XBAP, the specifications are as follows:

  • Downside is reduced, by up to 9%.
  • Upside is capped, to 10.20%.
  • Upside is leveraged, by 2x. Downside is unchanged, with a leverage ratio of 1x.
  • Outcome period, from 3/31/2021 to 03/31/2022.

The fund achieves the specifications above through buying the following option contracts:

(Source: XBAP Factsheet)

Showing how these options leads to the specifications above is outside the scope of this article, but Innovator ETFs does a very thorough job of this in their assorted documentation. Be sure to read the relevant documents if you want to understand the nitty-gritty behind these figures and securities. I will say that I've gone through the documentation, and I'm confident that the options perform as indicated by fund management.

These securities cause the fund's performance to vary depending on underlying market conditions. In general terms, we can say that:

  • XBAP will outperform during market downturns, as downside is reduced by the aforementioned 9%.
  • XBAP will outperform during periods of moderate stock market growth / gains, due to its 2x leverage ratio.
  • XBAP will underperform during periods of strong stock market growth / gains, as upside is capped at 10.20%.

XBAP provides investors with the following infographic showing the fund's expected performance during all relevant market conditions:

(Source: XBAP Factsheet)

As can be seen above, XBAP should outperform under all relevant market conditions except periods of high growth. Importantly, these periods are clearly defined, and last exactly one year, from April to April. Returns for other time periods could materially differ from the above, due to the peculiarities of option prices.

Other Innovator ETFs provide similar expected returns to XBAP, but the specifications change.

Now that we have some idea of how these funds work, let's look at their positives.

Innovator ETFs - Positives

Innovator ETFs have many strong, significant positives.

Innovator ETFs outperform during market downturns, as losses are buffered. This is a significant benefit for the fund and its shareholders, and should be particularly beneficial for retirees, risk-averse, or bearish investors. Capital preservation is key, and these funds are stronger than average in this.

Some Innovator ETFs outperform during moderate bull market, as upside is leveraged. This is also a significant benefit for the fund and their shareholders, although this only applies to some Innovator ETFs. This includes XBAP, the fund covered in detail earlier in the article, all ETFs mentioned at the top of the article.

Innovator ETFs are varied, so specific investors can choose the fund that works best for them.

If you want the most downside protection, there is the S&P 500 Ultra Buffer ETF (UAPR), which protects investors against losses of about 30%.

If you want the most leverage, there is the U.S. Equity Accelerated Plus ETF (XTAP), which provides investors with 3x the upside return of the S&P 500, up to a 16.20% cap.

If you want to combine equity indexes, there is the Triple Stacker ETF (TSJA), which provides exposure to the sum of three equity indexes, meaning 3x leverage, up to a 18.30% cap.

Different funds means investors are able to choose the specific fund which most suits their need, a significant benefit.

Innovator ETFs are thoroughly documented, which means investors are able to more easily understand what it is that they are buying. Knowledge is power, so I see this a positive.

As mentioned previously, Innovator ETFs seem particularly appropriate for retirees, for whom capital preservation is paramount.

Innovator ETFs - Negatives

Although I think the Innovator ETFs are fantastic funds and investment opportunities, there are downsides to consider.

Innovator ETFs are expensive, with most sporting a 0.79% expense ratio. Higher expenses directly reduce shareholder returns, and are a significant negative. Expenses are particularly harmful considering Innovator ETFs all track an index, so there is little possibility of alpha. Expenses are, on the other hand, understandable, as structuring and trading these complicated products requires manpower / employees.

Innovator ETFs are likely to underperform during strong bull markets, as total returns are capped. More aggressive, bullish investors should consider alternatives to these funds.

Innovator ETFs are likely to underperform in the long term, due to their expense ratios, and due to the fees / costs involved in option contracts. Insurance against losses is costly, and costs are such that the insurance company always profits.

Innovator ETFs are complicated, which serves to increase risk and volatility, and might cause investors to buy products which they don't fully understand. Only invest in an Innovator Fund after reading through the relevant documentation, and after making sure you understand what returns to expect under different market conditions.

Innovator ETFs have specific outcome periods, so realized returns will differ from expected returns during most time periods. As an example, XBAP offers investors 2x the returns of the S&P 500 from 3/31/2021 to 03/31/2022. Returns will be different from 2x the returns of the S&P 500 until 03/31/2022. These differences could lead to (temporary) underperformance, and complicate matters for investors. Since inception, XBAP has underperformed the S&P 500, even though a naive reading of the fund would have led investors to think otherwise:

Data by YCharts

As can be seen above, XBAP has not experienced 2x the returns of the S&P 500. The discrepancy is due to the fact that the outcome period has yet to end (it ends in April 2022) and due to the peculiarities of option prices. These are quite sticky right now, as we are very far from their expiration, and investors know that anything can happen between now and April 2022. These should experience stronger movements as the expiration date nears.

Innovator ETFs realized returns might slightly differ from expected returns, due to trading costs and tracking error. As an example, the S&P 500 Buffer ETF (BAPR), the S&P 500 Power Buffer ETF (PAPR), and the S&P 500 Ultra Buffer ETF (UAPR), should have protected investors from losses from April 2019 to April 2020. In reality, BAPR and PAPR suffered small losses, even accounting for expenses, while UAPR suffered no losses, performing better than expected after accounting for fees.


Data by YCharts

Innovator ETFs should perform in line with management documentation, but do expect some small differences. Remember, these funds employ complicated strategies, and execution is never perfect.

Innovator ETFs - Due Diligence Check

Finally, and considering the complexity of these funds, I think investors looking to invest in these ETFs should make sure to do all their due diligence.

Read the documentation.

Look through the Education Center.

Do the math. Yourself.

Then decide if Innovator ETFs are appropriate choices for you as an investor.

Remember, these are complicated products, but there is more than enough documentation for you to understand them, and to understand what to expect of them. I do think these are fantastic choices for most retirees, but perhaps certain details are off-putting to individual investors, and so it is important for you to understand the details.


Innovator ETFs offer investors equity market exposure, at different leverage ratios, upside and downside potential. Most offer reduced downside while sacrificing upside, a reasonable tradeoff, and one that should be particularly appropriate for retirees. I think these are fantastic choices, but obviously targeted towards retirees or other risk-averse investors.

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This article was written by

Juan de la Hoz profile picture
CEF/ETF income and arbitrage strategies, 8%+ portfolio yields

Juan has previously worked as a fixed income trader, financial analyst, operations analyst, and economics professor in Canada and Colombia. He has hands-on experience analyzing, trading, and negotiating fixed-income securities, including bonds, money markets, and interbank trade financing, across markets and currencies. He focuses on dividend, bond, and income funds, with a strong focus on ETFs, and enjoys researching strategies for income investors to increase their returns while lowering risk.


I provide my work regularly to CEF/ETF Income Laboratory with articles that have an exclusivity period, this is noted in such articles. CEF/ETF Income Laboratory is a Marketplace Service provided by Stanford Chemist, right here on Seeking Alpha.


Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was originally published to members of the CEF/ETF Income Laboratory on April 26th, 2021.

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