Innovator ETFs CIO Day Talks Goldman Sachs Acquisition, Future Options ETFs

In major ETF industry news last week, Goldman Sachs Asset Management completed its acquisition of Innovator Capital Management. Innovator has contributed immensely to ETF product development, with the firm notable for its defined outcome options ETFs. The move brings Innovator’s approximately $31 billion in “assets under supervision” (AUS) across 171 total ETFs under GSAM’s roof, bringing the latter’s total ETF list to 240 ETFs overall and $90 billion AUS.

Key Takeaways

• The Goldman Sachs Asset Management acquisition may help Innovator ETFs reach a broader audience.
• The shop’s defined outcome ETFs are a popular and growing segment of options ETFs.
• Day believes white space remains in the options ETFs world.

VettaFi sat down with Innovator ETFs CIO Graham Day to discuss the move as well as the future of those defined outcome ETFs. Day, who joined the firm in 2017, has been part of many of the shop’s launches in the defined outcome space, one of the more popular options ETF segments. Day shared excitement about the potential for GSAM to help the firm get its defined outcome ETFs out to a bigger audience.

“What we have found is, despite being in the market for eight years…the majority of advisors don’t really know about defined outcome ETFs, or they’re not using them at this time,” he said. “And I think … what we’ve experienced in the first part of the year is a perfect testimony to why defined outcome ETFs are so valuable. Because since the Iran War started, the traditional hedges haven’t worked.”

Options ETFs Innovation at Innovator

Day emphasized that, with bonds, stocks, and gold disappointing amid Middle East volatility, it has been defined outcome ETFs that have met the moment. They have offered “risk management you can count on,” he said. 

“That’s where we continue to see advisors just coming back to defined outcome ETFs,” he added. “They need to stay invested, but they want to have that built-in protection to give their clients a level of certainty.”

Frequently, he explained, advisors ask where these ETFs might fit in a portfolio. He shared that he and his team have often been surprised by the diversify of use cases. For example, some more risk-averse, retirement-aged investors might use defined outcome ETFs as a bigger part of their overall equity portfolio. Others who may not need income but want ballast can replace some of their bonds with the ETFs, in turn.

Looking ahead, he noted, the firm sees white space, backed by GSAM, to explore other options-based ETF strategies. In recent years, Innovator ETFs has launched so-called “dual directional ETFs” and “floor ETFs,” which Day pointed to as important innovations within the broad options ETF landscape.

Dual Directional and Floor ETFs

Dual directional ETFs aim for positive performance in both up and down markets. Floor ETFs, meanwhile, apply Parametric’s call selling strategy combined with put options to reduce volatility and hedge during drawdowns.

DDSQ, the Innovator Equity Dual Directional 5 Buffer ETF – Quarterly, just launched in January. The fund intends, per Day, to “give you the inverse performance of the S&P 500 for the first 5%.” When the market finished down 4.6%, he said, the ETF was up 4.6%. DDSQ charges a 79 basis point (bps) fee for that approach.

Floor ETFs, meanwhile, per Day, offer a different set of solutions compared to buffer ETFs. Advisors, Day said, came to the firm and shared their clients’ concern that their fear is less 10% losses and more huge events like a 2000 or 2008 downturn. 

“So the floor ETFs were brought with Parametric. They take on the first 10% of losses each year, but then the last 90% you’re protected,” he explained. “That’s an area that really no one else has brought competitive products.”

See more: Underweight Japan? Goldman Sachs Leaders Talk Fixed Income Decisions

The firm offers, for example, the Innovator Equity Managed Floor ETF (SFLR) to fit that bill. The fund charges an 89 bps fee to actively invest with that approach. 

Looking ahead, Day explained that he sees some similarities between this year’s market and 2022, when both bonds and equities struggled. Using the ETF wrapper’s liquidity and tax efficiency, the dual directional ETFs and floor ETFs could be ones to watch if Day’s prediction is borne out.

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