New Options Based Funds Aim for Positive Returns Whether Stocks Rise or Fall

Two newly launched exchange-traded funds (ETFs) aim to help investors achieve gains even when the broader stock market declines, adding a novel defensive strategy to their portfolios.

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On Tuesday, Innovator Capital Management introduced two products: the Equity Dual Directional 15 Buffer ETF — July (DDFL) and the Equity Dual Directional 10 Buffer ETF — July (DDTL). These ETFs are designed to generate positive returns across varying market conditions, including during downturns in the S&P 500. While the funds may still post losses during steep market declines, they’re expected to significantly outperform the index during such periods.

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These ETFs represent a new iteration in the growing field of defined outcome funds, a segment that has gained popularity, particularly after the turbulent year of 2022 when both stocks and bonds saw simultaneous declines. Most of these funds fall into the buffer fund category, which aims to shield investors from a predetermined portion of market losses.

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What makes these dual-directional funds unique is that, while they use the same options-based strategy as traditional buffer ETFs to provide downside protection, they also include an additional options component that allows for gains when markets fall—up to a point. Innovator's Chief Investment Officer, Graham Day, explained that these funds enhance traditional buffer strategies by adding a feature that allows for profit in mildly negative markets.

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“With standard buffers, you had downside protection but didn’t earn returns in down markets,” Day said. “The dual-directional structure lets investors make money when markets decline moderately, continue to benefit when markets rise, and still have protection during sharp downturns.”

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The structure of these ETFs is outlined in filings with the Securities and Exchange Commission (SEC). Both funds allow participation in market gains up to a specific cap, which resets annually and varies between the two products. For instance, the 10% buffer ETF (DDTL) has an initial upside cap of 12.59%, while the 15% buffer ETF (DDFL) caps upside at 8.79%.

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These funds are designed to deliver inverse returns up to their respective buffer levels in a down market. For example, if the S&P 500 drops 5% over the one-year term, the DDTL ETF would aim to gain 5%. If the market drops 10%, the ETF seeks a 10% gain. However, if losses exceed those buffer levels—say, 15% or 20%—the ETF’s positive return starts to erode, although it would likely still perform better than the index due to the built-in loss cushion.

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A simplified breakdown of the 10% buffer ETF's return profile before fees is as follows:

These figures don’t include the management fee of 0.79%.

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Like other buffer funds, these ETFs use FLEX options—customizable options contracts—to construct the defined outcome. They are structured for a 12-month holding period, meaning they are most effective when bought at launch and held until maturity. Buying or selling during the year could lead to different performance outcomes than what’s outlined in the official documentation.

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However, the added protection in negative markets comes at a cost. These new dual-directional funds generally offer lower upside caps than traditional buffer ETFs with the same time frame. Day cautioned that this trade-off is necessary to make the dual-directional feature possible.

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“There’s always a compromise,” Day said. “In this case, you're exchanging some of your potential gains in strong up markets in order to access the chance of positive returns in negative ones.”

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Innovator envisions that these funds could serve as substitutes for portions of investors’ fixed income holdings, especially in market environments where both stocks and bonds might be under pressure. This strategy could help diversify and stabilize portfolios in times of heightened volatility.

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Other asset managers are also entering the defined outcome space, experimenting with their own spin on buffered strategies. For instance, just last week, ProShares launched buffer ETFs that reset daily, providing more frequent rebalancing options for investors.

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In all, Innovator’s new ETFs reflect a broader trend of innovation in portfolio risk management tools, offering investors alternative strategies to ride out uncertain market conditions with greater flexibility and potential resilience.

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