In late November, we posted an article highlighting what’s expected to be a tidal wave of growth for defined outcome exchange traded funds, also known as buffer ETFs.
Here’s a brief synopsis, at least of the statistical highlights. Defined outcomes currently have approximately $70 billion in combined assets under management, but recent research published by Cerulli Associates indicates that tally could increase nearly fivefold by 2030.
Time will tell if that forecast proves accurate, but for advisors looking for clues regarding the growth trajectory of defined outcome ETFs, another arrived on Monday when Goldman Sachs Asset Management (GSAM), which houses the bank’s ETF business, announced the acquisition of Innovator Capital Management – one of the largest issuers of buffer ETFs.
GSAM is paying $2 billion in cash and equity to acquire Innovator, which had $28 billion in assets under management across 159 defined outcome ETFs as of the end of the third quarter.
A Nod to Active ETFs
Innovator has lived up to its name, ushering in a wave of adoption of defined outcome ETFs while making contributions to the growth of the actively managed ETFs.
“Active ETFs are dynamic, transformative, and have been one of the fastest-growing segments in today’s public investment landscape. By acquiring Innovator, Goldman Sachs will expand access to modern, world-class investment products for investor portfolios,” said David Solomon, Chairman and Chief Executive Officer of Goldman Sachs, in a statement. “Innovator’s reputation for innovation and leadership in defined outcome solutions complements our mission to enhance the client experience with sophisticated strategies that seek to deliver targeted, defined outcomes for investors. ”
Doing the quick, admittedly not precise math, GSAM is paying less than 10% of Innovators assets under management to acquire the define outcome ETF juggernaut. Arguably, what the buyer is really paying for is long-term growth. Data confirm the validity of that hypothesis.
“Having grown at 66% CAGR since 2020, defined outcome ETFs are a key component of the rapidly growing active ETF market, driven by the objective to deliver innovative structured strategies in accessible formats,” adds GSAM. “Investors are increasingly using defined outcome ETFs to add a broad and customizable range of objectives to their portfolios that meet their risk control needs and performance objectives. ”
Understanding Buffer ETF Enthusiasm
Buffer ETFs epitomize the old saying about there never being a free lunch in investing. To gain the downside protection offered by these products, investors sacrifice something and it’s significant. That being full participation in a bull market.
That said, understanding why defined outcome ETFs are notching significant growth and why some issuers will acquire related growth is easy. For as much as advisors and clients like upside, they equally, if not more, love downside protection. Buffer ETFs provide that.
“Defined outcome ETFs utilize derivatives and options-based strategies that seek to offer specific objectives such as principal downside protection, yield enhancement, and defined outcomes if invested for the full outcome period, allowing investors to build and customize portfolios through the tax-efficient ETF wrapper,” notes GSAM.
Due to the use of options overlays, ETFs, such as the ones issued by Innovator, offer attractive income streams that usually aren’t correlated to interest rates, making target outcome ETFs popular with advisors.