The No Downside ETF

Episode Summary

Executive Summary: The episode examines Innovator’s “defined outcome” ETFs, especially T-JUEL, a two-year ETF designed to provide 100% downside protection in exchange for capped upside. The hosts and guests explain the options structure, investor use cases, tax and fee advantages versus annuities and market-linked CDs, and why rising rates made the product viable and the category fast-growing.

Main Topics: Defined outcome ETFs vs. buffer ETFs (Priority: 5/5): Bruce Bond frames the category as “defined outcome” rather than just buffer ETFs, with buffers being one subset alongside accelerated, income-based, and defined protection structures. How T-JUEL delivers 100% downside protection (Priority: 5/5): The guests explain the mechanics: a deep in-the-money call, an at-the-money put for full downside protection, and a sold call to finance the package, resulting in a cap on upside. Trade-off: capped upside for principal protection (Priority: 5/5): The product offers equity participation up to 16.6% over two years, but investors give up dividends and any gains above the cap. Who should use it and when (Priority: 4/5): The discussion focuses on pre-retirees, retirees, and investors holding too much cash, while noting the ETF can be bought after launch and still provide a defined outcome for the remaining period. Tax efficiency and comparison to annuities/CDs (Priority: 4/5): The guests argue the ETF wrapper is cheaper, more liquid, and more tax-efficient than fixed indexed annuities and market-linked CDs, with no surrender charges or credit risk. Market growth, liquidity, and competition (Priority: 4/5): They address rapid asset growth, major entrants like BlackRock and JPMorgan, and why using highly liquid SPY/SPX options should support further scaling without severe liquidity strain. Why the product became feasible now (Priority: 3/5): Rising interest rates made full downside protection more economical than in prior years, enabling an ETF version of a structure long offered in insurance products.

Key Arguments: The ETF is not “free”: investors trade away dividends and upside above the cap in exchange for 100% downside protection. The options basket is fixed for the full outcome period, so the outcome is defined rather than actively managed. Buying early in the outcome period gives the cleanest exposure, but investors can still enter mid-period and receive a new defined outcome from that point. The structure can be more attractive than staying in cash, especially when investors fear volatility but still want equity exposure. The ETF wrapper can offer tax deferral, liquidity, lower fees, and no surrender charges compared with annuities and market-linked CDs. Using the most liquid options markets should help the strategy scale even as assets grow and competitors enter. Higher rates increased the feasibility of offering full protection, which was previously too expensive in insurance-style wrappers.

Data Points: Assets gathered by buffer/defined outcome ETFs this year: Over $5 billion - Growth cited by the hosts as evidence that the category is expanding quickly. Organic growth rate: 23% - Year-to-date growth rate mentioned for the category. Category size: About $30 billion - Current approximate size of the buffer ETF/defined outcome category. Upside cap on T-JUEL: 16.6% over two years - Maximum upside investors can capture in the ETF’s outcome period. Downside protection: 100% - The defining feature of T-JUEL if held through the full outcome period. Outcome period: 2 years - Investors must hold the product through the full period to receive the advertised cap/protection structure. Launch date: July 1 - T-JUEL was listed on July 1 in the discussion. Average annual S&P 500 return: 8.59% - Bruce cites long-run historical average as context for comparing the product’s capped upside. S&P positive over two-year periods: 90% - Historical statistic used to argue equities are often positive over two-year horizons. Average return in positive two-year markets: 32% - Used to show the upside investors may be giving up versus the ETF cap. Cash allocation among clients cited by JPMorgan: 25% to 30% - Referenced to show many investors are still parked in cash. 2023 market gain: 19% - Used to argue that moving to cash can cause investors to miss equity upside. Core bond performance: 2% to 2.5% - Presented as weak relative to what some investors expected from bonds. Fixed indexed annuity sales in 2022: $80 billion - Used to illustrate the size of the insurance-market opportunity that ETF wrappers may compete with. Largest ETF size mentioned: Just under $1 billion - Bruce says Innovator’s largest ETF is near this level. Daily SPY/SPX options trading: Almost $800 billion to $900 billion every day - Cited to argue the underlying option market is deep enough to support scaling. Open interest in SPY/SPX options: $7 trillion to $9 trillion - Used to emphasize liquidity and depth of the options market.

Pivotal Quotes: "“You can now participate in the equity markets with no downside risk and with upside.”" — Bruce Bond: Bruce summarizes the core investor proposition of T-JUEL. "“There’s no active management. There’s no one pulling levers behind the curtain.”" — Graham Day: Explaining that the options basket is fixed for the outcome period. "“It’s a great product… There’s nothing free within the investing world, as we all know.”" — Bruce Bond: He acknowledges the trade-off behind the protection structure.

Implications: Defined outcome ETFs are moving mainstream as a lower-cost, liquid alternative to annuities for investors who want stock exposure without full downside risk. If rates stay supportive, the category could keep growing and pressure traditional insurance products.