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A New Way To Minimize Small-Cap Volatility

ETF Professor

Over the long haul, small-cap stocks outperform their large-cap peers. Over the past 20 years, the widely followed Russell 2000 Index has delivered average annualized returns of 6.6% compared to 4.6% for the Russell 1000, but volatility has been higher for the small-cap Russell 2000.

“And while US small cap returns look relatively good for investors in hindsight over the past two decades, these returns have come with much higher relative volatility,” according to FTSE Russell. “The Russell 2000 had a 19.5% annualized standard deviation over the last 20 years as compared to 14.8% for the Russell 1000 and the Russell 2000 had a maximum drawdown of 54%.”

Innovator Capital Management, LLC, the exchange traded funds issuer behind a series of “buffered” ETFs, among other funds, recently added to its buffered roster with the debut of the Innovator Russell 2000 Power Buffer ETF (CBOE: KOCT).

Why It's Important

“Innovator Defined Outcome ETFs seek to provide a defined exposure to a broad market index (such as the S&P 500, MSCI EAFE, MSCI EM, Nasdaq 100, and Russell 2000) where the downside buffer level, upside growth potential to a Cap, and Outcome Period are all known, prior to investing,” according to ETF Trends.

In the case of the new KOCT, the fund debuted with a defined outcome period of 366 days, a downside buffer of 15% and an upside cap of 10.78%.

Over time, the downside protection and upside cap decline, meaning in order for investors to realize the full benefit of the 15% buffer with KOCT, the fund would need to be held from inception through the course of the outcome period.

What's Next

While missing out on some upside isn't always attractive to investors, experiencing all of an asset's downside is arguably less attractive. Innovator offers more than two dozen defined outcome ETFs, many of which have proven popular among advisors and investors.

“Innovator ETFs wanted to develop an ETF that matched the one year price return of the Russell 2000 Index with a cap while limiting downside losses,” said Innovator Vice President Graham Day. “The new ETF based on a Russell 2000 Index-based options strategy allows investors to remain invested in U.S. small-cap stocks with a built-in 15% buffer.”

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