Retirement Weekly: This new ETF can protect your portfolio from losses — but there’s a catch

by | Jul 21, 2023 | Stock Market

How much would you pay for insurance that immunizes your stock portfolio from losses? A just-launched exchange-traded fund in effect asks you that question. It is the Innovator Equity Defined Protection ETF
which began trading earlier this week. The ETF has what’s known as a two-year “outcome period,” over which it is designed to match the S&P 500’s
performance, up to a maximum of 16.62%, while also providing 100% downside protection.

Many investors, but especially retirees and near-retirees who have less time to recover from bear markets, are intrigued. Is this new ETF a good deal? There are two major factors you should take into account when deciding whether this ETF is appropriate. There’s more than one way to skin a cat The first thing to keep in mind is that there’s more than one way of duplicating the ETF’s approach. The core idea is to invest your portfolio in U.S. Treasurys and use the interest to purchase call options on the S&P 500. The maturity date of the bonds and expiration date of the options would be the same, and would reflect whatever time horizon over which you want to be protected from any losses. The approach is simple enough that you can do it yourself with relatively effort, thereby saving yourself the expenses of having someone else do it for you. This new ETF has an expense ratio of 0.79%, for example. To illustrate, you could invest approximately 91.5% of your equity portfolio in 2-year Treasurys and the remaining 8.5% in a two-year in-the-money call option on the S&P 500. You hold until the bonds mature and the call expires, and then do it all over again. The 91.5% bond allocation in my illustration is a function of 2-year Treasurys’ yield, which currently is 4.74%. At that …

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