Top ETF Picks For 2020: Innovator S&P 500 Power Buffer ETF (PJAN)

Note: This is just one in a series of articles talking about my top picks for 2020. I encourage you to check out my other top picks under the "Trade Ideas" tab and look for the "Top ETF Picks For 2020" heading!

Looking for S&P 500 returns with a built-in hedge against a percentage of the index’s losses?

Innovator’s series of defined outcome ETFs have been something of a revelation for investors looking for the best of both worlds. The high level explanation for how these funds work is that they use derivatives contracts in order protect against a certain percentage of S&P 500 losses while offering S&P 500 returns up to a certain cap.

In the case of the Power Buffer ETF, investors can earn up to 8.5% on the S&P 500 during the outcome period (the case of PJAN, from January 1st through December 31st) while protecting against the first 15% of losses.

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That's right! S&P 500 returns while protecting yourself against anything outside of a major market correction.

The tradeoff with these products is that you’re sacrificing possible returns in exchange for a downside buffer. In the case of PJAN, if you invest on the first day of the outcome period, you’re protected against the first 15% of losses in the S&P 500 but your gains are capped at 8.5% for the year.

The payoff profile of the fund demonstrates how returns might look.

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Innovator offers several different products with varying levels of returns and buffers depending on what kind of protection you’re looking for. Generally speaking, the higher the cap on the S&P 500 returns, the lower the downside protection and vice versa.

Innovator originally launched the line of defined outcome ETFs with just quarterly outcome periods on the S&P 500. They've since expanded the lineup to include monthly products and now cover the Nasdaq, Russell 2000, developed and emerging markets in addition to the S&P 500. You can literally build a fully diversified portfolio using just these products.

These buffer ETFs are a bit technical to get a full understanding of how they work and I don’t want to get too far into the weeds here, but if you want to maintain exposure to equities in case prices keep rising while protecting yourself against a sharp sudden downturn, these buffer ETFs are worth a look (and to be clear, Innovator offers dozens of these funds with different caps and buffers).

An interesting strategy would be to rollover your investment into a new buffer ETF every month. That would essentially reset your downside buffer every month while maintaining most of the equity upside. It could, in theory, eliminate much of the downside risk in your portfolio indefinitely.

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