In the rapidly expanding world of buffer funds, there is now an option for investors who want 100% downside protection. The Innovator Equity Defined Protection ETF ( TJUL ) was introduced on Tuesday, the latest in the firm’s defined-outcome collection of funds. It is designed to provide full downside protection to investors over a two-year period, in exchange for a capped upside participation of approximately 16.6%. Buffer funds from Innovator and other issuers have remained popular with investors in 2023 even as stocks have rallied. Money market funds have seen huge inflows this year, suggesting that many investors are still reluctant to make risky investments. “Advisors all have clients or potential clients who are very scared of investing,” said Tim Urbanowicz, head of research and strategy at Innovator. “They can’t afford volatility or short-term declines, and so they just miss out. … What this strategy was designed to do was give those types of clients an alternative to getting cash in the market.” The fund is essentially a three-pronged options strategy, using flex options. Effectively, the strategy involves buying a call option on the SPDR S&P 500 ETF Trust (SPY) with a strike price well below the current market level, providing upside participation. Then, the innovator will buy a put option that is “in the money” for downside protection, while selling a call option that has a strike price above the current market level. That second call option helps offset the price of the other two but limits the potential upside. To be sure, the fund’s total return may still be slightly negative after accounting for fees and fund expenses. The Equity Defined Protection ETF has an annual expense ratio of 0.79%. Timing is key A key wrinkle in the fund is that downside protection and an upside cap relate to the timing of the fund’s setup. In other words, if the market rises 10% in the next month, an investor who buys into the fund at that time will have some potential downside and less potential upside. “With a product like this, investors really have to pay attention to what the remaining cap is. If you get liquidated too early, obviously there’s not much incentive to get into the product,” said Aniket Ullal, head of ETF data and analytics at CFRA. “So I think there are going to be periods when it’s more attractive than others, depending on… the market. But I think that’s just the nature of all defined outcome products,” he added. The two-year time factor is also an important consideration for investors. Because the fund has derivatives, it won’t track the SPY perfectly when the options are far from expiring. That means the fund won’t rise immediately if there’s a big market rally in the next six months, for example, and investors will have to wait until mid-2025 to get their full upside. “In the beginning, you won’t see much movement,” Urbanowicz said. “If the market is up, you’re not going to see as much participation as you would traditionally [fund] Because you have that time value component attached to the options position.” He added that given the market price of the options used to create the strategy, a two-year time frame was needed for investors to move up meaningfully. Other safe-yielding securities would compete with TJUL. In particular, perhaps, 2-year US Treasury notes mean that half can currently trade at more than 47%. TJUL’s potential upside with the same time frame as is considered the safest asset class. Tax efficiency TJUL also doesn’t pay dividends or coupons, which means the fund makes more sense for investors who don’t need extra cash and want to limit their taxes. Among these different strategies,” Urbanowicz said. Innovator offers monthly versions of its funds for other buffer products, but plans to have semiannual versions of this latest fund, Urbanowicz said.