Burke Ashenden

Yeah, thanks so much for having me. I'm excited to be here. My current role is head of capital markets at Innovator ETFs. My background is grounded in ETFs. I started my career on the trading side at Virtu Financial, which is an ETF market making firm in New York. Cut my teeth under some of those traders, learned how ETFs work, learned how to trade them, learned a lot about liquidity. And then from there, came over to the dark side of the ETF issuers. Spent some time at Direction doing the leveraged ETFs with that team over there. Great team. And then joined Innovator a little over three years ago to start this defined outcome ETF journey. That's great. And so before we kind of jump

Into that defined outcome, defined protection suite, I always like to ask people, what are you doing when you're not working, not behind the desk? Any hobbies, things you enjoy doing?

Yeah. I made the move from New York City after eight years out west to California recently. So spending a lot more time outside than I ever did in New York. So I'd say hiking is something we do a lot about here. Muir Woods isn't too far from us. So we're definitely spending

More time outside. Yeah. I live in Pittsburgh, so I don't envy... I'm sure you are well aware of what the northeast weather pattern. And so anytime I can get out to the west side of the country,

It's always an enjoyable experience. Oh yeah. It can be brutal. I know it.

So let's talk about Innovator ETFs as a whole. The firm has a large suite of ETFs. I know they're siloed into some different strategies. But what do you want Innovator to be known for? What specifically are you guys really, really good at? Yeah. So Innovator as a firm launched their

First ETF in 2018. So our founders were Bruce Bond and John Southard, the original founders of PowerShares ETFs. So legends in the industry. They sold that business to Invesco. And the great story is one of them was pitched a structured note, actually, in their pseudo-retirement. And the light bulb went off and they said, you know what? This is a gigantic market. It's not necessarily touching advisors. It's more so insurance. And there could be a better way to structure these products in the ETF wrapper. So 2018 launched our first Defined Outcome ETF. And if there's one thing you have to know about Innovator, it's this is all we do. Defined Outcome ETFs is our singular focus. We pioneered the space in 2018. Competition has come in. You've seen other issuers launch similar

So let's talk about what Defined Outcome is and also what Defined Protection products are as a whole. So how do they differ and explain to the advisors to really what they're trying to accomplish?

So Defined Outcome ETFs are kind of the umbrella. You can think about that as the high-level catch-all for these ETFs. And we started with buffers. They were just buffer ETFs. We launched a 15% buffer against the S&P. So really simply in that example, over a one-year outcome period, that ETF will give you a 0% to negative 15% buffer against losses. And in exchange for that protection, you have a cap on the upside. So we'll call that cap 14%, which is about what it is right now. So no free lunch. We give you that downside protection in exchange for that upside cap. If the market moves below negative 15% over that one-year outcome period, you're going to take on any losses. So just quick numbers. If the market's down 20% and a 15% buffer, you're going to be down 5%. If the market's down 10% and

About today, are they also on the same quarterly cadence or are they monthlies?

So the outcome periods can be quarterly. They can be annual. And we actually offer different monthly series. So Brad, you'll notice we have a ton of tickers on our website, over 100 ETS at this point, which is kind of crazy to say out loud. And the reason we did that is we want funds to be resetting every month. So if advisors have money coming in throughout the year, they can get in right at the start of that new outcome period. So for instance, our June series just rolled a couple of days ago. So P-June, P-J-UN is our 15 buffer there. That just rolled. So advisors bought in on that day one or around day one, and they can hold that for the entire outcome period and have that protection. If they miss June 1 and they want to come in in July,

So how are these ETFs kind of structured internally in terms of the holdings? Is it, they're all outcome, or I'm sorry, are they all option packages? why don't we pick one? Let's pick one of your new issues and kind of whichever one you want. And we'll kind of talk about how internally that is built in order to achieve the objective.

Yeah. So I guess let's talk about the defined protection since that's what I was hoping to cover today. Those are 100% buffer ETFs. So you can think about them very similarly to the rest of our buffer suite. It's a basket of options is what it is at the end of the day. Flex options are what we use. Flex, you can just think of flexible. You can customize the tenor, you can customize the strike. And that's what gives us that pinpoint accuracy, which is what allows us to deliver a defined outcome. We get questions all the time. Could we just use listed options? Why do we have to use flex? Could we just use whatever is available on screens? We certainly could, but we wouldn't have

So let's talk about kind of like a one-year defined protection of 100%. So you just released that June series of that one. Do I have that correct?

They're actually coming in July. July. Three coming, but we already have a couple out there that were launched last July that were two-year outcome periods. Now we're taking them annual in six months.

Okay. So for an annual, on the July, I don't know if you have the exact outcome period yet in terms of the cap, but roughly, let's say that cap is somewhere in the 8% to 9%. Is that fair? That's right. It's actually pricing above 9% right now. Okay, great. But it's not a one-to-one. So if I'm an advisor buying, this product, and I am looking to cap the S&P exposure at 9% with 100% downside protection, and the market moves up 9% in the first month in January, right? I'm not going to actually make 9% in the ETF. That NAV is not going to move up 9%. And that's because of the decay of the, or the time value of the option. Is that correct?

That's exactly right. You can expect a lag intraperiod. So the defined outcome is realized outcome period. So if you hold that until the end of the one year, that defined outcome will be realized on the last day of the outcome period at the close. Now, people don't always think about this with these types of ETFs, but you have a defined outcome at any point during the outcome period when you buy, if you hold until the end. So in that example you gave, a client could also buy in halfway through that one-year outcome period at the six-month mark, if they like that payoff, and they could hold it until the end of the outcome period and still have a defined outcome, it would just look different than it was on day one.

And you actually took one of my questions there. So is there a way, if I'm thinking through this, is there a way to generate additional alpha maybe over the cap if the market starts the year highly negative? Or is the cap the cap?

The cap is the cap. But if the market does move down negatively, you're just going to have more cap. So it has that sated cap on the first day of the outcome period. But in that example you gave, if the market starts the outcome period down 5% in the first week or two, you get a sharp drawdown, ETF may trade down slightly. It's not going to trade down one-to-one, and you may have some additional upside cap.

So you have three full downside protection ETFs, six-month, one-year, and two-year. They're launching in July. Can you talk about maybe how advisors look at them differently and maybe how they're using them? Because I can see using a six-month a little bit differently than the two-year. So how do you guys at Innovator define best practice of using these three different outcome periods?

Yeah. So we were trying to solve for a couple of different problems when we launched these ETFs. Like I mentioned before, Structured Note World, we use as our North Star when we're thinking about new products. And if you look at that space, it's been booming, frankly, over the past few years. 2023 was a record year for structured note issuance, over $100 billion. And principally protected notes were a humongous portion of that. In fact, that's one of the biggest growth areas of the past two years. So people love that idea of principal protection for their investment. And you can think about FIAs, you can think about annuities. Those spaces have been growing significantly as well over the past two years. So principally protected structures is what we were trying to target with

So if I'm a model portfolio provider and I'm looking to create risk-managed portfolios, let's say something off of a 70-30, a 60-40, or even let's call it a 30-70. And my clients are in the growth stage of their life. They don't need the income. Could there be an argument that you could utilize some of these as a fixed income and volatility dampener in an overall portfolio, rather than having to rely on the fixed income markets to reduce some standard deviation volatility

Out of the portfolio? Most definitely. The use cases are numerous. It could be a conservative equity allocation. With a 9% cap on the S&P over one year, that's above the average S&P return when you look historically. So that right there in and of itself could be a conservative equity allocation. Bonds, we are definitely seeing it used as a short-term fixed income alternative. Like I said before, you're getting a decent yield right now at a fixed income. I won't deny that, but taxes matter. So to your point, if someone's going to hold this in perpetuity, the cool thing about these ETFs is they reset within the structure. So every year or every six months or every two years, depending on what ETF you buy, it's going to roll within the ETF wrapper. And there's no taxable event. You're

So when looking through the entire suite, you've got various different buffers. You've got 100% downside protection ETFs over multiple different periods. I'm sure you can create, and I'm sure internally you guys have talked about this, some really cool portfolios that have broader defined outcomes by combining some of these in an asset allocation. Can you talk about that at all? Or is that discussion? I saw briefly, and I didn't do enough due diligence. I hope you can talk through it. Some model portfolios you guys have that are on the site, but I'm sure there's a way to combine some of these different products to create something pretty cool.

Yeah. no doubt that's where the puck is going. I think across the industry, model portfolios, it's just simple for advisors to implement. So we launched our own off-the-shelf model portfolios, on our website, just because advisors kept asking for some sort of direction around how they can implement this in a model. So if you go to Innovator Research, we actually have model portfolios on the website, and we help advisors think about how they can implement these within that model allocation. To your point, you could put the six-month with the two-year, and you get some pretty interesting risk-return characteristics, or you could pair the 100% buffer with a 15% buffer to allow you to have a little bit more upside than just if you were in our

So I know that there's a billion different use cases for these, which makes them unique. I think they're great products. If you're sitting down with an advisor, though, with an already static standard model portfolio, you've got their large cap equity bucket, they've got some fixed income in there, maybe they're holding some alts. Where are you advising them first to start implementing a full 100% downside protection? I would assume that's in the cash bucket. I think that is your first. When you're talking to advisors that have already created a diversified model portfolio, what products are you trying to lead with and where would you put them?

So right now, we're definitely leading with the 100% buffer ETFs. The 15% buffer, we call it our power buffer, is sort of our bread and butter. If people are going to try their first buffer ETF, that's generally the most popular. It's kind of that sweet spot where it could be hedged equity and also just a core equity allocation. For the defined protection ETFs, which is what we've been talking about, it doesn't make a difference if you put a 5% or a 3% allocation in the portfolio, you'd have a meaningful allocation to this for it to actually make a difference. So we would say 20% of the portfolio, maybe even 30% pulling from that alts, that fixed income, and that cash. Advisors, it was really interesting. When we go back to COVID and rates came all the way

So what would the difference between a one year and a two year 100% of, or is there an advantage of using a two over a one? Why not just let the one year roll over and having that flexibility at the roll period to be able to either find something else or generate a new cap? What would compel someone to use a two instead of just rolling a one twice?

It's a really, really good question. And we got it a lot because we launched the two year first. And folks asked, why didn't you do the six month? Why didn't you do the one year? So a couple of reasons. The first is, think about how markets work, right? So your frequency of getting capped out is going to be higher potentially with a shorter outcome period. So with the two year, if the market skyrockets 15% in one year, and then it has a lower return the following year, a 3% return, you're going to get to capture all of that upside in the two year product versus let's say the market, how often, I'll pause, how often does the market actually return the average, right? Very rarely. Almost never. Yeah. Never, right? So the market kind of goes like this.

No, I asked this question earlier, but just from my knowledge, if it's a two year outcome period, and as in your example, the market skyrockets in year one, say 15%, maybe you're only going to capture 7% of that upside. You can prove me wrong. This is just the way my head's working. But if the next year it's up only 3%, you're going to continue to earn incremental NAV up to that cap or close to that cap in year two. So you might only get 30% to 50% of the actual return of year one. Am I thinking

About that correctly? You're right. There will definitely be lag. You're not going to move one to one with ETF during the outcome period. But if you think about it, what if the market does nothing for the next year? It just stays flat. Well, then you're just going to see that ETFs NAV appreciate up to that cap. So it's just different flavors for different folks. And at Innovator, we just want to give you the broadest set of solutions.

Yeah. No, I love that because I'm thinking of a situation where if I'm a tactical active advisor, and I think I have a pretty flattish view of what the market is going to do that year, and you have a two year defined outcome that's got some growing to do, it makes sense to add it because you know that if the market does nothing that year, there's going to be some alpha there. So it's interesting. I find these products extremely interesting, how they work. Can you just go through the six month, the one year, and the two year July issues, what those tickers are, and what the current caps are that you're expecting in those products for July 1?

Yes. JJL is the six month product, and that's pricing a near 5% cap right now. ZJUL is the one year ticker, and that's pricing a high nines close to 10% cap. And then AJUL is the two year ticker, and that's pricing around an 18 to 19% cap. So those are the three funds launching. too, I'll just add, Brad, that with these types of ETFs, we talked about the structured note side of things. We surveyed advisors, and the big things that they value are liquidity, simplicity, and costs. So the ETF just wins on all of those fronts relative to some of those legacy

Solutions. Yeah, I was actually staying on that topic, was having this conversation with a friend of mine, and said this, the structured note of business, even though it boomed last year, is going to be completely taken over by these things. The liquidity in the cost is just way too attractive, as well as the flexibility, not to utilize these rather than kind of an old fashioned

Insurance based structured note product. Yeah, when you think about some of the headaches that come with those products, phantom income is one that just drives people crazy. You're going to get hit with that intraocum period with some of those structured products. If you want to sell out, you're probably going to cross a gargantuan spread if you can even get out at all in the structured products. So we talked about that lag earlier intraperiod with ETFs. Sure, it's going to lag on the upside if you want to exit before the end of the outcome period. But having that escape patch for advisors is also really valuable. Well, Burke, I really appreciate your time.

Before I let you go, is there anything else you want to discuss regarding Innovator, any of these ETFs? Again, you guys have a huge lineup. And so I want to make sure I give you the opportunity if there's anything cool you guys are working on to share it with us now.

Yeah, Brad. thank you so much for the time today. I would just say that when you think about Defined Outcome ETFs and you look at our broad suite, yes, it is a lot of ETFs, but the concepts are really simple. They're just different monthly series, different flavors of the same product. So I would encourage advisors or whoever's listening to this call to go to our website and look at our tools. We have spent a lot of time creating these tools to help simplify things for advisors. We have a potential outcome analyzer tool that lets you see your outcomes based on that specific point at which you buy. We have previous outcome analyzer tool, which lets you look back at older outcome periods. So the tools are there. We have a sales team in each territory that can help answer

Well, again, before I let you go, where can people actually get that information? So can you give them kind of your website or any other research-based websites you guys have? Yes. I would point them to innovatoretfs.com. All right. Well, again, Burke, thank you so much for your time. I appreciate you being with us today. Thanks so much, Brett. Thanks so much. Bye. Bye.

Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye. Bye.