Two investment strategies for people who are afraid of the stock market

There is a tendency for people who have worked and saved up money to steer clear of the stock market when deciding what to do with their cash. For these investors, defined-outcome strategies offer a way to “tiptoe into the equity markets knowing they have protection in place,” according to Graham Day, the chief investment officer at Innovator from Goldman Sachs Asset Management.

Innovator Capital Management was founded in 2017 and acquired by Goldman Sachs on April 2. Innovator has about $33 billion in assets under management in 160 exchange-traded funds.

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A defined-outcome or buffered ETF is one that protects the investor by limiting downside risk in return for giving up some of the broad stock market’s upside potential. One reason Innovator has so many ETFs is that some of them follow annual strategies that are reset monthly. So there might be 12 monthly versions of the same strategy. Other Innovator strategies are followed by individual ETFs that apply downside buffers and adjust their levels of upside capture quarterly.

A buffered ETF’s manager can limit the downside risk through derivative trades, using option-premium income to enable the protection.

A risk-averse investing public

Day told MarketWatch that when the Innovator team started the firm in 2017, they were aware that “the majority of money [was] in risk-averse assets,” including ”bonds, annuities and others providing downside protection.”

“The mass of investors is not willing to take risk. If they are invested, they are overweighted bonds. If they are going to get into the stock market, they are going to need protection,” he said.

This chart from Goldman Sachs Investment Research shows trailing 12-month money flows into and out of mutual funds and ETFs through April 14.

Justifying exposure to the stock market

According to LSEG, the average annual return for the S&P 500 SPX for 30 years through 2025 was 10.4%. Performance for U.S. large-cap stocks has been stronger during more recent years. The S&P 500’s 10-year average annual return was 14.8% through 2025. All returns in this article include reinvested dividends and for funds are net of expenses.

During this 10-year run for the S&P 500, there were two down years, with a decline of 18.2% in 2022 and a decline of 4.4% in 2018. The 2022 decline was led by the information technology sector, as the Federal Open Market Committee raised short-term interest rates drastically in an effort to lower inflation. It is easy to look back and say most investors in 2022 were best off not trying to time the market but rather staying in, as the S&P 500 rebounded with gains of 26.3% in 2023 and 25% in 2024. But waiting through a down period can be difficult for some investors who might be tempted to sell into the declining market.

Before moving to the defined-outcome ETFs, let’s make another long-term case for stocks.

Using data models developed by Eugene Fama, a professor of finance at the University of Chicago Booth School of Business, and Kenneth French, a professor of finance at the Tuck School of Business, Dartmouth College, the Prudent Speculator prepared this table showing average annual returns for various asset classes from March 31, 1977, through the end of 2025:

The Prudent Speculator is a value-oriented newsletter published by Kovitz Investment Group of Chicago. Regardless of how stocks are categorized, the above table supports the notion that for long-term investors building up nest eggs, stocks have outperformed bonds by wide margins.

Adding protection

Day made clear that defined-outcome or buffered ETFs were not designed to outperform underlying stock indexes. These funds can be tools for investment advisers to help their clients “tiptoe into the equity markets knowing they have protection in place,” he said.

Innovator offers a series of ETFs that have 15% buffers for exposure to the S&P 500 or other stock indexes over one-year time frames. These are in groups of 12, with the strategy reset each month. The Innovator defined-outcome ETFs are sub-advised by Parametric, a subsidiary of Morgan Stanley.

If the fund is based on the S&P 500 and features a 15% buffer, it means that if the index goes down 20% during the year in which you hold it, your decline will only be 5%. For monthly series of Innovator buffered ETFs, the upside limit is changed upon annual reset, according to market conditions. According to Day, the current upside limit for ETFs with 15% buffers based on the S&P 500 is 14%.

Under this scenario, if the S&P 500 were to increase 20% during the year you held the ETF, your gain would be 14%. “In that scenario, you will get 70% of that gain and be far better off than if you are sitting in bonds,” Day said.

So for advisers and investors, monthly series offer refreshed 12-month protection at any time of the year, with a fixed level of downside protection, while the upside caps will fluctuate. And if you roll over one of these ETFs after the 12-month period, any taxable capital gains can be deferred until you decide to sell. Since these funds are traded on exchanges, you can change your mind and sell (or buy) shares at any time when the stock market is open.

And there are other ways to get protection with individual funds that apply buffers and reset upside caps quarterly.

Day named two examples of ETFs that offer different types of protection, with one being much more conservative than the other.

A conservative example

The Innovator Defined Wealth Shield ETF BALT was established in July 2021. It has $2.4 billion in assets under management and is designed to be an alternative for investors who have been holding mostly bonds. Day said that some advisers had been telling the Innovator team in 2020 that “a 15% buffer was not enough” for some of their clients. Keeping in mind how low interest rates were during the COVID-19 pandemic, “advisers said that since bond funds were yielding 1%, clients wanted to make money but to be protected,” he said.

So BALT tracks the return of the State Street SPDR S&P 500 ETF Trust SPY with 20% downside protection each quarter and an upside cap of 2% to 3% each quarter. Here is how both funds performed during 2022 and for each quarter that year:

BALT returned 2.4% during 2022, while SPY fell 18.2%. The quarterly application of the buffer worked out well for investors, especially during the second quarter of that year. The small negative quarterly returns for BALT resulted from the fund’s expenses, which come to 0.69% of assets annually. That makes for annual fees totaling $69 for a $10,000 investment.

BALT’s protection comes at a price. It might only be appropriate for very conservative investors. Its protection would certainly be comforting for an investor in 2022. But in 2023, when SPY returned 26.2%, BALT returned only 7.5%.

Day described BALT as “an alternative conservative solution for investors who don’t want interest-rate risk.” That refers to the inverse relationship between interest rates and bonds’ market values. As interest rates rise, bond prices decline and vice versa.

Day added that BALT might also be “a good alternative for investors who don’t want bond interest because it is tax-inefficient.”

A managed-floor ETF

An ETF with a floor will allow you to bear a certain percentage of a stock index’s decline while giving up less upside potential than would be required by a fund such as BALT.

The Innovator Equity Managed Floor ETF SFLR was established in November 2022 and now has $1.6 billion in assets. It protects investors from S&P 500 declines of more than 10% when the floor is reset each quarter, while it aims to capture 70% to 80% of the broad stock market’s return.

SFLR doesn’t have a long performance record. During 2023 it returned 20.2%, while SPY returned 26.2%. So in return for protecting 90% of investors’ capital on a quarterly basis, the fund’s annual return turned out to be 77% that of SPY.

BALT and SFLR serve different purposes. BALT offers full protection against losses of up to 20% on a quarterly basis, while SFLR protects 90% of capital. In a bull market, SFLR can be expected to perform better.

Again, neither fund is designed to beat the S&P 500’s return over the long term. But the protection during a very bad year for the index might be what some investors need.

“What we want to do is get people to stay invested,” Day said.

Two competing defined-outcome ETFs

Buffered ETFs have different objectives, different levels of protection and different upside capture. This means it isn’t easy to make direct comparisons of competing funds.

Leaving aside individual ETFs within 12-month series of funds with monthly resets, FactSet lists only two FT Vest ETFs as competitors for BALT and SFLR. So here are returns and expense ratios for four defined-outcome ETFs for one year and three years through April 27, with SPY at the bottom for reference. To the right you can see total returns for 2022, to show how each performed during that down year and in 2023.

The FT Vest Laddered Buffer ETF BUFR is a laddered portfolio that holds shares of 12 FT Vest U.S. Equity Buffer ETFs that are reset monthly, with buffers on the first 10% of SPY’s declines.

The FT Vest Laddered Deep Buffer ETF BUFD is similar to BUFR but holds shares of 12 FT Vest U.S. Equity Buffer ETFs that are reset monthly, with buffers on the first 5% to 30% of SPY’s declines.

SFLR has had the best three-year return among the four defined-outcome ETFs listed here. BALT fared best among the four during the down year of 2022.

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