The S&P 500 is up more in 2021 so far than it usually gains in a whole year. But if you think the excitement is bound to dim, some ETFs aim to jazz things up a bit.
Six so-called Accelerated ETFs launched on April 1 with a simple pitch: Boost S&P 500 or Nasdaq 100 returns without taking on more risk. These ETFs let you double or triple market returns up to preset limits and over a preset time period.
They’re a unique twist on other ways to try boosting market returns using ETFs, specifically leveraged or equal-weight ETFs. But they stand apart by not amplifying excitement, or fear, on the downside.
“These ETFs provide some of the benefits of leveraged ETFs, double the upside, but with some risk mitigation with partial downside protection,” says Todd Rosenbluth, ETF and mutual fund strategist at CFRA. “These ETFs can support buy and hold investors better than traditional leveraged ETFs that are best suited for those with short-time horizons.”
Pick Your S&P 500 And Nasdaq Accelerator
The Accelerated ETFs allow you to customize your approach. You just need to make a few decisions.
You choose which stock index your ETF will accelerate, either the S&P 500 or Nasdaq 100. Next, opt for how much you’d like to accelerate, either two times or three times. And you decide if you want any downside protection and what you want your acceleration time outcome period to be, either annual or quarterly.
Let’s say you want to accelerate S&P 500 returns by two times, but don’t need any downside protection. And you’re OK with an initial one-year outcome period. The Innovator U.S. Equity Accelerated ETF – April (XDAP) applies. It will double the S&P 500’s returns up to an initial cap of 17.16%. Need a 9% cushion in the case of a market decline? That’s where the Innovator U.S. Equity Accelerated 9 Buffer ETF – April (XBAP) comes in.
“This is for a person who thinks over the next year, maybe returns are a little frothy and return expectations aren’t quite as rosy,” said John Southard, chief investment officer at Innovator Capital Management, which sponsors the ETFs. The investor thinks, “‘I want to accelerate (my returns) over a one-year time period,'” he said.
How would the U.S. Equity Accelerated ETF work? Let’s say the S&P 500 only gains 5% in a year’s time. You’d be up double that, 10%, by holding the ETF at the end of the outcome period in April 2022. And if the S&P 500 rises 10%, you’re up 17.2% in the ETF.
But if the S&P 500 falls 10%, you’re only down 10%. That’s much different from traditional leveraged ETFs, that would multiply your losses, too.
Know The Risks Of Accelerating The S&P 500
There’s no free lunch in investing. And these ETFs have some added downsides.
The biggest catch? There’s a cap on the upside potential. If the S&P 500 soars 30%, for instance, your gain is limited to the ETF’s cap. In this case, you could clip your upside in a year to just 17.2%. Additionally, you don’t get any dividends. And that’s a drag as dividends account for roughly a third of S&P 500 returns over time.
There is also a lag time before the acceleration kicks in due to the time-value lag of the options used to build the ETFs. You should plan to hold one of these ETFs with an outcome period of a year for at least four months so you benefit, Southard says.
And the fees are also higher than you’d pay on standard index ETFs. The Innovator U.S. Equity Accelerated ETF charges 0.79% annually. Most S&P 500 index funds can be had for as little as 0.03%.
But investors who buy these are looking for unique solutions. The Accelerated ETFs are an evolution of Innovator Capital Management’s “buffer ETFs.” These ETFs, which have already attracted roughly $4 billion in assets, soften the blow from S&P 500 declines.
“Innovator made a name for themselves giving regular investors patterns of returns that normally have only existed in fairly arcane structures, like structured products,” said Dave Nadig, director of research at ETFflows.com. “These new funds from Innovator are no different, and I suspect they’re going to appeal to a cadre of performance hungry, yet risk-averse investors.”
Double (Or Triple) Your Pleasure
New Innovator Accelerated ETFs let you boost market upside to a limit, without magnifying risk.
|ETF||Symbol||Benchmark||Upside to Cap||Downside||Starting Upside Cap||Period|
|U.S. Equity Accelerated Plus – April||(XTAP)||SPY||3X||1X||16.20%||Annual|
|U.S. Equity Accelerated – April||(XDAP)||SPY||2X||1X||17.16%||Annual|
|U.S. Equity Accelerated 9 Buffer – April||(XBAP)||SPY||2X||1X with 9% buffer||10.20%||Annual|
|U.S. Equity Accelerated – Quarterly||(XDSQ)||SPY||2X||1X||6.70%||Quarterly|
|Growth Accelerated Plus – April||(QTAP)||QQQ||3X||1X||21.30%||Annual|
|Growth Accelerated – Quarterly||(XDQQ)||QQQ||2X||1X||9.50%||Quarterly|
Sources: IBD, S&P Global Market Intelligence, Innovator Capital Management