Hello! This is MarketWatch reporter Isabel Wang bringing you this week\u2019s ETF Wrap. In this week\u2019s edition, we look at the increasingly popular \u201cbuffer\u201d ETF concept. Innovator Capital Management launched an ETF that may offer investors complete protection against stock-market losses over a two-year timeframe.\u00a0<\/p>\n
Please send tips, or feedback, to isabel.wang@marketwatch.com or to christine.idzelis@marketwatch.com. You can also follow me on Twitter at\u00a0@Isabelxwang<\/a>\u00a0and find Christine at\u00a0@CIdzelis<\/a>.<\/p>\n Sign up\u00a0here\u00a0for our weekly ETF Wrap.<\/p>\n The pioneer and provider of the world\u2019s largest lineup of buffer exchange-traded funds (ETFs), or defined outcome ETFs, has launched a new product that could provide investors 100% protection against stock-market losses as well as potential gains with a cap over a two-year timeframe.\u00a0<\/p>\n The Innovator Equity Defined Protection ETF \u201cWe saw that clients hold on too much cash and the reason for that is they\u2019re fearful of getting into the market or they can\u2019t stomach the short-term drawdown and the short-term volatility that comes along with equity investing,\u201d said Tim Urbanowicz, head of research and investment strategy at Innovator ETFs. \u201cWhat we wanted to do is really provide a way for investors to get cash off the sidelines, get into the market, and know that you have 100% downside protection.\u201d\u00a0<\/p>\n Strategists at Innovator ETFs are seeing a surging amount of cash move into market-linked CDs, cash, bank deposits and fixed-indexed Treasuries when investors are facing uncertain market conditions amid sticky inflation and interest-rate hikes by the Federal Reserve. That means there is a high demand for buffer ETFs like TJUL, which have a \u201creturn potential significantly higher with this strategy than any of other options,\u201d Urbanowicz told MarketWatch in a phone interview on Thursday.\u00a0<\/p>\n Meanwhile, unlike fixed-indexed annuities and market-linked CDs, TJUL is expected to provide investors a beneficial 1099 tax treatment. It does not carry bank credit risk as the fund is not backed by the faith and credit of an issuing institution, and it does not require a minimum investment.\u00a0<\/p>\n \u201cWe see a pretty big tax advantage for the strategy relative to cash, cash like instruments and T-bills, where those strategies are paying out interest that\u2019s going to be taxed at ordinary income rates,\u201d said Urbanowicz. \u201cWith this strategy, there\u2019s no distributions that are taking place, so it really allows clients more control as to when they pay taxes, as long as they hold the ETF for a year, that gain is going to be taxed at a long-term capital gain rate.\u201d\u00a0<\/p>\n See: <\/strong>This \u2018buffer\u2019 strategy for stock market investors has been a winner<\/p>\n Buffer ETFs emerged years ago as standout options for investors looking to manage market volatility. However, they have become particularly prominent this year, and further growth has appeared after BlackRock, the world\u2019s largest asset manager, recently debuted its first two buffer funds, the iShares Large Cap Moderate Buffer ETF See: <\/strong>BlackRock launches its first \u2018buffer\u2019 ETFs for stock-market investors worried about a potential fall<\/p>\n Charles Champagne, head of ETF strategy at Allianz Investment Management, said fund managers of buffer ETFs usually utilize an options-based strategy. \u201cHow we do it is we buy a call deep in the money so that gives us a long equity exposure. And then we overlay a put-spread on top of that, which creates that downside buffer, and then we sell a call, which then defines that upside cap.\u201d\u00a0<\/p>\n Investors will consider buying call options if they are optimistic about the prospects of its underlying shares. In other words, if the market goes up, they will buy the shares in the future at today\u2019s prices. When selling a call option, they\u2019re selling the right to purchase underlying shares at a set price before a certain date. If the price stays the same or goes down, investors will keep the premium as profit. The bull put spread, as shown in the chart below, is used when the option trader thinks that the underlying security\u2019s price will rise before the put options expire.<\/p>\n As a relatively newer asset manager to the buffer ETF space, strategists at Allianz Investment Management (AllianzIM) saw great growth in its defined outcome ETF business last year when both the stock and fixed-income markets crashed. <\/p>\n They started 2022 with over $342 million in assets under management and ended the year at around $800 million. However, investors started flocking into buffer ETFs in 2023 due to a lack of conviction in the markets, bringing the firm\u2019s suite to roughly $1.3 billion as of July 14, according to AllianzIM data shared with MarketWatch.\u00a0<\/p>\n For example, the AllianzIM U.S. Large Cap Buffer 20 January ETF However, this popular type of ETF might not be a good fit for investors that have \u201chigh risk tolerance\u201d or do not factor in negative outcomes from their equity positions, warned Champagne.\u00a0<\/p>\n \u201c[These products are not designed for] investors that are seeking alpha generation for their portfolio or are really bullish on it with a short-term view on the markets. They\u2019re more designed for investors that do want to play in the equity markets but don\u2019t want to take all of the risks involved with that,\u201d he told MarketWatch via phone on Thursday.\u00a0<\/p>\n Meanwhile, some risk-averse investors would rather hold Treasury bills, which are still one of the safest places to store their savings and earn interest in the short-term, as the 3-month Treasury bill rate
\n TJUL,
\n
\n the \u201cfirst-of-its-kind\u201d fund aims to offer investors the upside return of the SPDR S&P 500 ETF Trust
\n SPY,
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\n to a 16.62% cap, and a complete buffer against its downside over a two-year outcome period, according to a company statement on Tuesday.\u00a0<\/p>\n
\n IVVM,
\n
\n and iShares Large Cap Deep Buffer ETF
\n IVVB,
\n
\n \u00a0<\/p>\nSOURCE: INNOVATOR ETFS<\/h4>\n<\/figcaption><\/figure>\n<\/p><\/div>\n
\n JANW,
\n
\n which is designed to provide a downside buffer of 20% against market drops over a 12-month period, has risen 10% so far this year, compared to an 18.2% gain in the SPDR S&P 500 ETF Trust, according to FactSet data.\u00a0<\/p>\n
\n TMUBMUSD03M,
\n
\n stood at 5.40%, while the 2-year Treasury
\n TMUBMUSD02Y,
\n
\n yielded 4.85% after reaching a level not seen in 16 years earlier this year, according to FactSet data.\u00a0<\/p>\nThe good\u2026<\/h2>\n
\n
\n \n Top Performers<\/strong><\/p>\n<\/td>\n \n %Performance<\/strong><\/p>\n<\/td>\n<\/tr>\n \n \n SPDR S&P Regional Banking ETF
\n KRE,
\n \n 7.3<\/p>\n<\/td>\n<\/tr>\n \n \n iShares U.S. Healthcare Providers ETF
\n IHF,
\n \n 6.2<\/p>\n<\/td>\n<\/tr>\n \n \n SPDR S&P Bank ETF
\n KBE,
\n \n 6.1<\/p>\n<\/td>\n<\/tr>\n \n \n iShares U.S. Regional Banks ETF
\n IAT,
\n \n 5.9<\/p>\n<\/td>\n<\/tr>\n \n \n Invesco KBW Bank ETF
\n KBWB,
\n \n 4.5<\/p>\n<\/td>\n<\/tr>\n \n \n Source: FactSet data through Wednesday, July 19. Excludes ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater.<\/p>\n<\/td>\n<\/tr>\n<\/table>\n \u2026and the bad<\/h2>\n
\n
\n \n Bottom Performers<\/strong><\/p>\n<\/td>\n \n %Performance<\/strong><\/p>\n<\/td>\n<\/tr>\n \n \n KraneShares CSI China Internet ETF
\n KWEB,
\n \n -6.2<\/p>\n<\/td>\n<\/tr>\n \n \n ProShares Bitcoin Strategy ETF
\n BITO,
\n \n -5.9<\/p>\n<\/td>\n<\/tr>\n \n \n Invesco China Technology ETF
\n CQQQ,
\n \n -4.7<\/p>\n<\/td>\n<\/tr>\n \n \n WisdomTree China ex-State-Owned Enterprise Fund
\n CXSE,
\n \n -4.1<\/p>\n<\/td>\n<\/tr>\n \n \n iShares MSCI China ETF
\n MCHI,
\n \n -3.9<\/p>\n<\/td>\n<\/tr>\n \n \n Source: FactSet data<\/p>\n<\/td>\n<\/tr>\n<\/table>\n New ETFs<\/h2>\n
\n
\n AVSC,
\n
\n which\u00a0invests in a diverse group of non-U.S. small-cap companies across market sectors, industry groups and countries. <\/p>\n<\/li>\n
\n TSEC,
\n
\n an actively-managed, fully-transparent ETF that seeks to invest in a diversified portfolio of fixed-income securities, which began trading on\u00a0July 19, 2023.<\/p>\n<\/li>\n<\/ul>\nWeekly ETF reads<\/h2>\n<\/p><\/div>\n