WEBVTT - Innovator’s Ashenden on Risk-Managed Exposure 0:00:14.560 --> 0:00:17.759 Welcome to Inside Active, a podcast about active managers that 0:00:17.840 --> 0:00:20.960 goes beyond sound bites and headlines and looks deeper into 0:00:21.000 --> 0:00:26.480 their processes, challenges, and philosophies and security selection. I'm David Cohne, 0:00:26.520 --> 0:00:29.800 I lead mutual fund and active Research at Bloomberg Intelligence. 0:00:30.160 --> 0:00:34.040 Today my co host is James Seyffert, ETF, analyst at 0:00:34.040 --> 0:00:37.080 Bloomberg Intelligence. James, thank you for joining me today. 0:00:37.320 --> 0:00:39.360 Yeah, happy to be back, David, thank you for having me. 0:00:39.600 --> 0:00:43.000 So, James, we've talked about Buffer ETFs in the past, 0:00:43.159 --> 0:00:45.920 but how are they doing in terms of flows this year? 0:00:47.040 --> 0:00:47.360 Yeah? 0:00:47.400 --> 0:00:50.159 So, I mean I think of Buffer's ETFs in this 0:00:50.280 --> 0:00:53.640 like broader category of like these you know a lot 0:00:53.640 --> 0:00:56.720 of derivative based products that are either like seeking some 0:00:56.840 --> 0:00:58.920 sort of income or some sort of protection or some 0:00:59.040 --> 0:01:03.480 sort of accelerated ye. But within Buffer specifically, that's probably 0:01:03.480 --> 0:01:06.399 the most successful within that deridit of landscape. And I 0:01:06.400 --> 0:01:08.720 think they've taken in a little over ten billion this year. 0:01:09.360 --> 0:01:10.960 I mean, if you look at the category, I mean, 0:01:11.120 --> 0:01:13.320 it didn't exist a few years ago and now we're 0:01:13.319 --> 0:01:16.080 looking I consider it like a fifty billion dollar category 0:01:16.080 --> 0:01:19.040 for buffers overall. So no matter how you slice it 0:01:19.080 --> 0:01:22.600 like this has been a smashing success and honestly like 0:01:22.640 --> 0:01:25.480 this is something that our team has been looking at 0:01:25.520 --> 0:01:29.120 and covering for a long time now. But yeah, this 0:01:29.600 --> 0:01:31.720 this is finding its home in the ETF industry and 0:01:31.760 --> 0:01:32.600 it's doing really well. 0:01:33.240 --> 0:01:35.120 Nice well. I think it'd be a great time to 0:01:35.160 --> 0:01:38.720 bring on our guests. We'd like to welcome Burke Ashington 0:01:38.800 --> 0:01:42.039 to the podcast. Burke is director of Capital Markets at 0:01:42.080 --> 0:01:45.080 Innovator ETFs. Burke, thanks for joining us today. 0:01:45.360 --> 0:01:47.480 Great to be here, guys, James David, it's pleasure. 0:01:47.600 --> 0:01:49.280 So Burt, can you tell us a little bit about 0:01:49.320 --> 0:01:52.240 your career and how you got started in the ETF industry. 0:01:52.840 --> 0:01:56.040 Yeah, happy to I've known James and the ETF team 0:01:56.040 --> 0:01:58.840 at Bloomberg for a few years here. Before my tenure 0:01:58.880 --> 0:02:02.560 at Innovator, started on a trade desk, so it was 0:02:02.640 --> 0:02:07.520 CASEG Holdings. It then became Virtuo Financial, an ETF market 0:02:07.520 --> 0:02:10.760 making firm, so cut my teeth on the trading desk. 0:02:11.360 --> 0:02:16.640 I love that fast paced environment, competitive atmosphere. And you know, 0:02:16.760 --> 0:02:20.240 Virtuo Financial specializes in ETF trading, so our desk did 0:02:20.240 --> 0:02:23.640 a lot of arbitrage ETF trading, ETF block trading, so 0:02:23.760 --> 0:02:25.720 more of a technical start, I would say, on the 0:02:25.720 --> 0:02:28.600 ETF side, and it kind of gave me a background 0:02:28.600 --> 0:02:32.240 grounded in ETF pricing, how the ETFs are structured, but 0:02:32.280 --> 0:02:34.000 also got a little bit of a glimpse into how 0:02:34.000 --> 0:02:36.200 to launch an ETF because you're the l m M 0:02:36.360 --> 0:02:40.239 or lead market maker and typically provided c capital for 0:02:40.280 --> 0:02:42.760 a lot of ETFs that were brought to market. So 0:02:42.960 --> 0:02:46.480 after Virtuo Financial, I kind of went over to the 0:02:46.520 --> 0:02:49.160 dark side, as we like to say, the ETF issuer side, 0:02:50.080 --> 0:02:52.400 and went to Direction ETFs and that's where I got 0:02:52.400 --> 0:02:56.640 my first taste of derivatives within the ETF rapper. Direction 0:02:56.720 --> 0:03:00.880 specializes in the leveraged and inverse funds, a really interesting firm. 0:03:01.040 --> 0:03:03.440 I'm on the forefront of innovation there, but focus more 0:03:03.440 --> 0:03:06.440 on the tactical trading crowd. But you know, I saw 0:03:06.520 --> 0:03:09.679 there kind of the writing on the wall that derivatives 0:03:09.760 --> 0:03:12.480 in the ETF rapper were still in the early stages. 0:03:12.960 --> 0:03:16.960 You could use them to leverage returns accelerate your upside, 0:03:17.480 --> 0:03:20.360 but you could also use them to insert protection in 0:03:20.400 --> 0:03:24.119 the ETF rapper. So you know, from there I got 0:03:24.120 --> 0:03:27.600 put in touch with more of a startup ETF firm 0:03:27.600 --> 0:03:31.000 innovator Capital Management was the name. They were based in Wheaton, Illinois. 0:03:31.639 --> 0:03:36.280 I was looking for an earlier stage ETF firm and 0:03:36.440 --> 0:03:38.640 got put in touch with them and ended up being 0:03:38.640 --> 0:03:40.920 sort of the first product hire undergrad Day are now 0:03:41.000 --> 0:03:44.280 CIO and we can talk more about Innovator in a second. 0:03:44.320 --> 0:03:46.720 But we're doing some pretty disruptive stuff over here. 0:03:48.000 --> 0:03:51.120 Great. Well, actually, let's you know, as you talked, you 0:03:51.200 --> 0:03:54.120 mentioned Innovator. What's the innovator story? 0:03:54.840 --> 0:03:58.240 Yeah, Innovator has a really interesting story. You know, Bruce 0:03:58.280 --> 0:04:01.360 Bond and John Southard are found So Bruce Bond and 0:04:01.440 --> 0:04:05.520 John Southard, we're the original founders of Power Shares ETF 0:04:06.120 --> 0:04:10.520 ETF's trail breke blazers in the ETF market. They really 0:04:10.520 --> 0:04:14.440 pioneered the segments like smart, Beta, the matic, even household 0:04:14.520 --> 0:04:17.640 names like the cues, so they were first to market 0:04:17.680 --> 0:04:20.400 with a lot of those names. They sold that business 0:04:21.040 --> 0:04:25.000 to Investo around two thousand and six and they retired. 0:04:25.600 --> 0:04:28.840 They went into retirement pseudo retirements, and one of them 0:04:28.920 --> 0:04:32.600 was pitched a structured note in retirements, and that's where 0:04:32.640 --> 0:04:34.599 the story gets really interesting. The light bulb sort of 0:04:34.600 --> 0:04:37.000 went off and they said, you know what, there may 0:04:37.040 --> 0:04:40.280 be a better way to package this risk managed exposure 0:04:40.320 --> 0:04:44.520 that we see in structured notes ryla's annuities, that type 0:04:44.520 --> 0:04:47.719 of risk managed exposure that's typically only existed facing a 0:04:47.800 --> 0:04:52.000 single counterparty like a bank or an insurance company. How 0:04:52.000 --> 0:04:55.440 can we deliver that kind of exposure in the ETF wrapper? 0:04:56.040 --> 0:04:57.800 And we know you know, you guys know this better 0:04:57.880 --> 0:05:02.600 than anyone. The ETF rapper delivers liquidity, tax efficiency, transparency, 0:05:02.800 --> 0:05:08.479 lower costs. So really Innovator's mission is to disrupt the 0:05:08.520 --> 0:05:11.839 structured product annuity hedge fund industries by trying to provide 0:05:12.279 --> 0:05:16.400 superior outcomes in the ETF rapper for those reasons that 0:05:16.440 --> 0:05:18.960 we mentioned before. So our entire business is built around 0:05:18.960 --> 0:05:23.920 delivering risk managed payoffs in a very easy to digest, inexpensive, 0:05:23.960 --> 0:05:24.880 transparent rapper. 0:05:26.160 --> 0:05:28.279 I want to add real quick something that brick kind 0:05:28.279 --> 0:05:31.240 of glossed over there. We in Illinois as like a 0:05:31.279 --> 0:05:34.360 small Midwest town, and it's probably got on a per 0:05:34.400 --> 0:05:37.240 capita basis the most amount of dollars in the asset 0:05:37.279 --> 0:05:40.800 management industry of any place in the world. It's an 0:05:40.800 --> 0:05:43.960 ETF capital. I mean, like, as you mentioned, power Shares 0:05:44.000 --> 0:05:46.760 are now owned by Invesco, is based there first trust 0:05:46.880 --> 0:05:51.120 based there. Innovator now twenty plus billion dollar firm based there. 0:05:51.720 --> 0:05:55.480 Amplify ETFs, which also bought another ETF firm, is based there. 0:05:55.480 --> 0:05:58.760 So there's a lot of people from coming out of 0:05:58.800 --> 0:06:02.600 Wheaton College and Illinois that are based in the ETF industry. 0:06:02.600 --> 0:06:04.919 It's a powerhouse. So people probably heard wheat in Illinois 0:06:04.960 --> 0:06:06.480 and don't know, but it really is. 0:06:06.520 --> 0:06:08.480 There's a lot of people that are based out there 0:06:08.480 --> 0:06:10.600 in this industry. 0:06:10.680 --> 0:06:14.200 Well, you talked about, you know, just aid Innovator. I'd 0:06:14.200 --> 0:06:18.279 really love to learn how defined outcome ETFs work at Innovator. 0:06:19.360 --> 0:06:22.240 Yeah, yeah, happy to so defind out come ETFs. Like 0:06:22.279 --> 0:06:25.200 I mentioned before, we pioneered this category, so we launched 0:06:25.200 --> 0:06:29.280 the first ETF in twenty eighteen. It was our fifteen 0:06:29.320 --> 0:06:31.520 percent buffer. To this day, it remains one of the 0:06:31.560 --> 0:06:34.000 most popular ETFs in our suite. So I'll use a 0:06:34.000 --> 0:06:36.640 fifteen buffer as the example as we go through this. 0:06:37.800 --> 0:06:40.320 But just how do they work and what is their function? 0:06:40.640 --> 0:06:45.240 So defined out COMEDTF isn't really anything new, right, Like, 0:06:45.320 --> 0:06:47.920 these types of payoffs have existed in the structured note 0:06:48.000 --> 0:06:51.600 rapper for many years, but we simply kind of shepherded 0:06:51.960 --> 0:06:55.240 that exposure over into the ETF rapper. So there's three 0:06:55.279 --> 0:06:58.040 things that you need to know when you're talking about 0:06:58.040 --> 0:07:01.480 a defined out COMEDTF. The first this is BTF has 0:07:01.480 --> 0:07:03.760 an outcome period, so that's a specific set of time. 0:07:03.920 --> 0:07:06.040 It could be three months or a quarter. It could 0:07:06.080 --> 0:07:08.320 be one year, it could be two years. That is 0:07:08.360 --> 0:07:11.400 the time over which the defined outcome exists. Then you 0:07:11.440 --> 0:07:13.920 have your protection that could be a buffer or a 0:07:13.960 --> 0:07:16.320 barrier against losses, which we'll talk about more in a 0:07:16.360 --> 0:07:20.160 moment that cushions you against losses, protects you in the 0:07:20.200 --> 0:07:24.280 fifteen percent buffer example I gave that buffers you from 0:07:24.360 --> 0:07:28.000 zero to negative fifteen percent. So over a one year 0:07:28.040 --> 0:07:30.840 outcome period in the ETF, a tick orrell I'll throw 0:07:30.840 --> 0:07:33.720 out is poct. That's our fifteen percent buffer on the 0:07:33.760 --> 0:07:36.560 S and P five hundred that ETF is designed to 0:07:36.560 --> 0:07:39.520 deliver you point to point exposure to the S and 0:07:39.560 --> 0:07:42.560 P five hundred its price return over one year with 0:07:42.640 --> 0:07:45.760 a fifteen percent buffer against losses. And then the third 0:07:45.760 --> 0:07:48.640 component that I'll mention is there's an upside cap, so 0:07:48.680 --> 0:07:51.000 there's no free lunch with the product. Even though you 0:07:51.040 --> 0:07:53.160 have a buffer against losses, you're going to have a 0:07:53.160 --> 0:07:56.360 cap on the upside So if the market finishes down 0:07:56.440 --> 0:07:58.960 twenty percent at the end of that one year, you're 0:07:59.000 --> 0:08:01.280 going to be down five percent in the fifteen percent 0:08:01.320 --> 0:08:05.240 buffer ETF. If the market is down ten percent, you're buffered. 0:08:05.320 --> 0:08:07.480 You're completely covered. The buffer did what it was supposed 0:08:07.520 --> 0:08:10.240 to do, and you were flat. Now on the upside, 0:08:10.480 --> 0:08:12.640 you're going to track one to one with the price 0:08:12.680 --> 0:08:15.480 return of SPY. So let's say you have a twelve 0:08:15.480 --> 0:08:19.080 percent upside cap in that ETF. If the market's skyrockets 0:08:19.080 --> 0:08:22.240 and is up thirty percent over that one year, you're 0:08:22.280 --> 0:08:24.120 going to hit your cap. You're going to be capped out, 0:08:24.160 --> 0:08:26.560 as we like to say an innovator, and your return 0:08:26.640 --> 0:08:29.520 is going to be twelve percent. But if the market 0:08:29.520 --> 0:08:32.040 finishes up five you're going to be up five. You're 0:08:32.040 --> 0:08:34.880 going to track one to one with that ETF over 0:08:34.920 --> 0:08:40.080 that outcome period. So again, outcome period, protection level, and 0:08:40.200 --> 0:08:42.360 upside cap or those three core components. 0:08:43.400 --> 0:08:45.880 Yeah, so let's let's get into this little bit the 0:08:45.920 --> 0:08:48.120 buffer version of the defined outcome products. 0:08:48.120 --> 0:08:49.920 Those are the first ones that really. 0:08:49.679 --> 0:08:51.800 Caught fire, But you have a bunch of other defined 0:08:51.840 --> 0:08:55.240 outcome type products that are focused on income, accelerated returns, 0:08:55.880 --> 0:08:59.120 full protection on the downside, different floors. Can you just 0:08:59.200 --> 0:09:02.079 go into like the differences between how they're structured and 0:09:02.760 --> 0:09:05.280 what those different things are trying to do your your 0:09:05.320 --> 0:09:07.280 other products, I guess besides just the buffer. 0:09:07.760 --> 0:09:11.120 Yeah, yeah, definitely. So defined out come ETFs is kind 0:09:11.120 --> 0:09:13.480 of the umbrella, right, like everything lives under the defined 0:09:13.480 --> 0:09:17.840 out com ETF umbrella. You're launching different segments under that umbrella. 0:09:17.920 --> 0:09:21.360 So buffers, for instance, provide you a buffer against losses. 0:09:21.600 --> 0:09:25.000 We mentioned this before. Once you move below the buffer level, 0:09:25.120 --> 0:09:27.120 you start to take on those losses one to one, 0:09:27.200 --> 0:09:29.560 but if you finish anywhere in that buffer, you're covered. 0:09:30.040 --> 0:09:32.880 A barrier is a little bit different, So we offer 0:09:32.960 --> 0:09:37.800 barrier income ETFs. That's a very popular type of structured notes, 0:09:38.320 --> 0:09:40.880 and again we're bringing that to the ETF rapper. Now 0:09:41.320 --> 0:09:44.480 that type of solution offers a set amount of income 0:09:44.640 --> 0:09:46.400 on the upside, so we sell options you have a 0:09:46.400 --> 0:09:49.360 set income level on the upside, so you're not going 0:09:49.440 --> 0:09:51.560 to track the price return of the index. You're just 0:09:51.559 --> 0:09:54.120 going to have that set income level. But your protection 0:09:54.280 --> 0:09:56.480 is a barrier. So a barrier is a little bit 0:09:56.480 --> 0:09:59.920 different than a buffer in that the barrier is protection 0:10:00.080 --> 0:10:02.680 in place, but if you fall below the barrier, you've 0:10:02.679 --> 0:10:06.480 now assumed all losses, including up until the barrier and 0:10:06.520 --> 0:10:08.720 beyond the barrier. So just put some numbers to it. 0:10:09.360 --> 0:10:13.199 A fifteen barrier, if the market finished down twenty, you're 0:10:13.240 --> 0:10:15.280 going to be down in twenty because you kind of 0:10:15.360 --> 0:10:18.040 locked into that barrier. You're taking on all the losses 0:10:18.080 --> 0:10:20.720 once you went through the barrier level Versus with a 0:10:20.720 --> 0:10:23.560 fifteen buffer, if the market was down twenty, you're just 0:10:23.559 --> 0:10:26.080 going to be down five. So you can imagine since 0:10:26.080 --> 0:10:28.920 there's more risk with the barrier, you're compensated a little 0:10:28.960 --> 0:10:32.080 bit more on the upside. But to be honest with you, James, 0:10:32.520 --> 0:10:34.400 you know most of the assets are in the buffers, 0:10:34.400 --> 0:10:37.000 most of the interest is in the buffer space right now. 0:10:37.040 --> 0:10:40.640 But we are beginning to see interest in barriers and accelerated. 0:10:42.400 --> 0:10:43.880 Awesome, So can you talk a little bit. 0:10:43.960 --> 0:10:46.880 You mentioned like these outcome periods, and like everything I 0:10:46.920 --> 0:10:48.719 see for the most part right now, seems to be 0:10:49.080 --> 0:10:52.600 following these one year outcome periods. Right, what is the 0:10:52.679 --> 0:10:55.240 rebalance frequency? So on those obviously it's one year, Like 0:10:55.240 --> 0:10:57.640 what are you seeing are you seeing interest in? Like 0:10:57.760 --> 0:11:01.880 we're interested in one month outcome period three month out comperiods, 0:11:01.960 --> 0:11:04.800 multi year. I mean you talk about direction, those leverage 0:11:04.840 --> 0:11:07.800 ETFs right now, we see some issuers toying with doing 0:11:07.840 --> 0:11:10.280 things longer than leverage on a daily basis. So those 0:11:10.280 --> 0:11:12.320 direction products that offer you three times a return of 0:11:12.360 --> 0:11:15.320 something or inverse return, it only tracks it for a day. 0:11:15.640 --> 0:11:17.360 You guys are going the opposite where like you're kind 0:11:17.360 --> 0:11:19.320 of only offering this thing over year. Like, are you 0:11:19.320 --> 0:11:22.400 seeing interest in other areas of those outcomeperiods? 0:11:23.120 --> 0:11:26.000 We are, Yeah. So we started with annual outcome periods, 0:11:26.320 --> 0:11:29.480 and again our strategies are more defensive in nature, is 0:11:29.520 --> 0:11:32.839 totally separate from a direction or appro shares. That being said, 0:11:33.320 --> 0:11:35.200 we started with one year. We've seen a lot of 0:11:35.200 --> 0:11:38.200 interesting quarterly outcome periods and the reason for that is 0:11:38.480 --> 0:11:41.800 there's a more frequent reset. So advisors, for instance, if 0:11:41.800 --> 0:11:44.480 they buy a one year outcomperiod and let's say the 0:11:44.520 --> 0:11:46.880 market moves up three months in the market's up ten 0:11:46.960 --> 0:11:49.960 or fifteen percent, that ETF that is a one year 0:11:50.000 --> 0:11:53.120 out comperiod has now moved up and has experienced some 0:11:53.160 --> 0:11:55.760 of its cap into that one year out comperiod. So 0:11:55.760 --> 0:11:58.199 if you were to buy into that ETF three months 0:11:58.200 --> 0:12:00.640 into the one year out comperiod, you actually now have 0:12:00.679 --> 0:12:02.520 a little bit of downside right and you have a 0:12:02.559 --> 0:12:05.480 little bit less cap. So that's why we typically see 0:12:05.559 --> 0:12:08.960 volume cluster around the beginning or the end of the 0:12:08.960 --> 0:12:12.280 outcome period, at least for our annual products. The reason 0:12:12.360 --> 0:12:15.600 we've seen quarterly outcome periods explode in popularity these are 0:12:15.600 --> 0:12:19.880 tickers like balt b alt zalt zlt is because of 0:12:19.920 --> 0:12:22.640 that more frequent reset, James, And that's that's really useful 0:12:22.679 --> 0:12:26.280 because advisors have money coming in throughout the year, so 0:12:26.320 --> 0:12:28.440 they don't necessarily always want to worry about do I 0:12:28.440 --> 0:12:31.439 buy this specific annual outcome period that's resetting in March. 0:12:31.800 --> 0:12:34.440 Do I need to buy a different annual outcome period 0:12:34.480 --> 0:12:36.880 resetting in August. Instead of lattering those they say, you 0:12:36.880 --> 0:12:39.360 know what, I'm just going to use a quarterly outcome 0:12:39.400 --> 0:12:42.120 period product, and when that money comes in throughout the year, 0:12:42.480 --> 0:12:45.240 I know that in the next month, two or three months, 0:12:45.400 --> 0:12:47.840 it's going to be resetting and getting a fresh downside 0:12:47.880 --> 0:12:49.880 buffer and a fresh upside cap. 0:12:51.840 --> 0:12:55.280 We're talking about the different kinds of buffer ETFs and 0:12:55.520 --> 0:12:58.040 the different options, but I'd love to hear, and I 0:12:58.080 --> 0:13:00.840 know our listeners would love to hear how these ETFs 0:13:00.880 --> 0:13:03.160 are actually managed. You know, what are the steps that 0:13:03.200 --> 0:13:05.679 the pms take to implement these strategies. 0:13:06.240 --> 0:13:10.199 Yeah, so we innovator is the advisor. Our subadvisor is 0:13:10.280 --> 0:13:13.320 Milliman Financial Risk Management, so we partner with them to 0:13:13.320 --> 0:13:16.200 bring these ETFs to market. They manage the day to 0:13:16.240 --> 0:13:20.120 day trading of these funds, and they have significant experience 0:13:20.160 --> 0:13:23.559 working with the largest bank and insurance balance sheets and derivatives. 0:13:24.080 --> 0:13:27.600 So the process is actually really simple, David. So the 0:13:27.640 --> 0:13:29.600 benefit of the ETF for APPER, as we mentioned before, 0:13:29.920 --> 0:13:33.880 the liquidity, the tax efficiency, the reset. So I'm going 0:13:33.960 --> 0:13:36.280 to double click on the reset here because it's really cool. 0:13:37.360 --> 0:13:41.079 We talked about outcome periods. What separates these ETFs from 0:13:41.120 --> 0:13:44.520 a traditional structured note. So at the end or xpery 0:13:44.800 --> 0:13:47.520 of a structured note, let's say it's one year, two years, 0:13:47.559 --> 0:13:51.080 or five years or six months at xpery, that is 0:13:51.080 --> 0:13:54.120 a taxable event that note comes due. That is a 0:13:54.120 --> 0:13:56.800 taxable event for the investor or the advisor and their 0:13:56.840 --> 0:14:00.840 client with the ETF at the end of the outcome period, 0:14:00.960 --> 0:14:02.680 at the end of that one year or three month 0:14:02.679 --> 0:14:06.840 out comperiod, it resets within the wrapper. So what that 0:14:06.920 --> 0:14:09.320 means is we're going to roll the exposure at the 0:14:09.400 --> 0:14:11.240 end of one year, and we're going to move into 0:14:11.280 --> 0:14:15.040 a new basket of options with a one year xpree. 0:14:15.080 --> 0:14:18.800 That process of either selling we're letting those options expire 0:14:19.080 --> 0:14:21.520 if they're in a lass position. In rolling into a 0:14:21.520 --> 0:14:25.280 new options basket is not a taxable event that occurs 0:14:25.320 --> 0:14:29.120 within the ETF wrapper. So it's not tax avoidance, it's 0:14:29.120 --> 0:14:32.480 tax deferral. We're deferring those gains to the future. But 0:14:32.560 --> 0:14:35.440 the benefit for you is the investor, is when you 0:14:35.480 --> 0:14:38.200 buy that ETF at the end of that outcome period, 0:14:38.400 --> 0:14:41.320 there's nothing that you need to do, absolutely nothing. You're 0:14:41.320 --> 0:14:43.520 going to get a fresh buffer and a fresh upside 0:14:43.520 --> 0:14:46.720 cap and you can hold the ETF in perpetuity and 0:14:46.840 --> 0:14:49.480 you decide when you want to experience that taxable event 0:14:49.720 --> 0:14:52.480 when you sell the ETF. So what actually happens behind 0:14:52.480 --> 0:14:54.520 the scenes on that reset day To answer your question, 0:14:56.200 --> 0:14:58.480 we move in and is that ETF approaches the end 0:14:58.520 --> 0:15:01.160 of its outcome period. On the final trading day of 0:15:01.160 --> 0:15:05.000 that outcome period, we close out that basket of options 0:15:05.080 --> 0:15:07.560 typically four options, which we can get into in a moment, 0:15:08.200 --> 0:15:10.600 and we roll into a new basket of options with 0:15:10.680 --> 0:15:13.200 a new one year expery and then even though these 0:15:13.240 --> 0:15:17.360 are classified as active ETFs, there's really no active management 0:15:17.440 --> 0:15:20.440 that's occurring. It's all systematic in nature. So once we 0:15:20.480 --> 0:15:23.000 strike those options at the beginning of the outcome period, 0:15:23.400 --> 0:15:26.280 that set of options with that xpery and those strikes 0:15:26.520 --> 0:15:28.520 are not going to change. Those will going to be 0:15:28.560 --> 0:15:31.360 the exact same options for the entirety of the outcome period. 0:15:31.520 --> 0:15:33.480 The only thing that's going to change is the quantity 0:15:33.680 --> 0:15:36.160 of the options in the basket when we see creations 0:15:36.240 --> 0:15:37.880 or redemptions in the ETF. 0:15:40.400 --> 0:15:42.520 So we've talked a lot of high level about like 0:15:42.560 --> 0:15:46.080 what these things offer in the outcome periods and the 0:15:46.120 --> 0:15:48.800 caps and the floors, but like, can you get into 0:15:48.840 --> 0:15:50.600 a little more detail you kind of hinted at there, 0:15:50.600 --> 0:15:53.160 and like what exactly is in these portfolios, like what 0:15:53.360 --> 0:15:55.920 is being held and how are you generating these you know, 0:15:56.240 --> 0:15:59.000 defined outcomes for these funds. 0:16:00.160 --> 0:16:03.400 So the magic really occurs in the flex options. So 0:16:03.440 --> 0:16:05.000 if you look under the hood, you peel back the 0:16:05.040 --> 0:16:08.480 onion of a defined out com ETF. We talked about 0:16:08.480 --> 0:16:10.960 a fifteen percent buffer earlier. We're going to stick on that. 0:16:11.280 --> 0:16:13.880 You'll see four options. The first is it deep in 0:16:13.920 --> 0:16:16.080 the money call that's going to act like you're one 0:16:16.080 --> 0:16:19.360 to one exposure to spy. You're going to have your protection, 0:16:19.600 --> 0:16:22.520 which is a put spread, typically an at the money 0:16:22.520 --> 0:16:25.360 put and then another puts sold about fifteen percent lower, 0:16:26.560 --> 0:16:28.600 and then we have a call on the upside that 0:16:28.640 --> 0:16:31.120 we sell, and we sell that call on the upside 0:16:31.120 --> 0:16:34.040 and that's what sets our cap for the outcome period. 0:16:34.480 --> 0:16:37.080 We're going to sell that call at the highest level 0:16:37.080 --> 0:16:39.920 that we can to set the cap that will perfectly 0:16:39.960 --> 0:16:42.880 finance the protection or the buffer that we have in 0:16:42.920 --> 0:16:46.720 place with those puts. So typically four options in that basket. 0:16:47.480 --> 0:16:50.680 They are exchange traded in their flex options, So flex 0:16:50.760 --> 0:16:54.680 is easy for your listeners. Flex is flexible. What that 0:16:54.720 --> 0:16:57.680 means is that we can customize the tenor we can 0:16:57.720 --> 0:17:01.040 customize the strike price. And the reason that we do 0:17:01.120 --> 0:17:04.000 that is we want to be able to communicate a 0:17:04.000 --> 0:17:08.200 perfect fifteen percent a perfect thirty percent buffer for our clients. 0:17:08.840 --> 0:17:10.679 And you know, putting on my market making have for 0:17:10.720 --> 0:17:14.760 a second. You know, these these ETFs and these options 0:17:15.240 --> 0:17:17.720 trade very similarly to like a listed option, So a 0:17:17.760 --> 0:17:20.680 flex option is really eased to hedge those market makers 0:17:20.720 --> 0:17:22.159 that are out there they've told me. It's kind of 0:17:22.160 --> 0:17:24.320 like a Swiss army knife. Of ways that you can 0:17:24.359 --> 0:17:28.239 hedge our ETFs. You can use spy, you can use 0:17:28.320 --> 0:17:32.160 spy options, you can use index options. The critical takeaway 0:17:32.200 --> 0:17:35.920 for your listeners is that the basket is hyper liquid. 0:17:36.480 --> 0:17:38.239 If you look under the hood of these ETFs, you'll 0:17:38.240 --> 0:17:41.000 see a basket of flex options tracking the most liquid 0:17:41.080 --> 0:17:45.159 equity benchmarks in the world. So spy iwm q's efa 0:17:45.359 --> 0:17:48.800 ee M, we're tapping into all of those liquid benchmarks 0:17:49.080 --> 0:17:51.439 with our flex options. So don't be to turn if 0:17:51.440 --> 0:17:53.880 you look into the basket and you see options. Remember 0:17:54.000 --> 0:17:57.520 they're tracking the most liquid benchmarks. They're very simple to hedge, 0:17:57.840 --> 0:17:59.439 and the proof's kind of in the pudding because if 0:17:59.440 --> 0:18:02.160 you look at the ds on screen, James, you'll see 0:18:02.200 --> 0:18:05.000 they're like fifteen to twenty basis points, which is super 0:18:05.040 --> 0:18:08.200 tight across the ETF landscape for ETFs. 0:18:09.880 --> 0:18:12.480 So how much of this is automated? 0:18:13.880 --> 0:18:17.359 Good question, Almost all of it, I would say systematic. 0:18:17.520 --> 0:18:21.119 So kind of an anecdote is when I was on 0:18:21.160 --> 0:18:24.840 the desk at Virtue, RFQs were just kind of getting 0:18:24.840 --> 0:18:27.119 their start. That's a Bloomberg turmoil. They're out there but 0:18:27.200 --> 0:18:30.879 it stands for requests for quote. And one of the 0:18:30.920 --> 0:18:32.359 things that we did when I was a trader on 0:18:32.400 --> 0:18:35.199 that desk is we were getting quotes from people all 0:18:35.280 --> 0:18:37.280 day long, people paying us saying I need to buy 0:18:37.280 --> 0:18:39.720 fifty thousand shares of this ETF eighty thousand shares of 0:18:39.760 --> 0:18:43.240 this ETF, and those quotes would hit the market making 0:18:43.280 --> 0:18:46.439 desks and they typically would put market makers in competition 0:18:46.880 --> 0:18:49.639 when an advisor or an institution wants to purchase a 0:18:49.680 --> 0:18:52.439 big block of an ETF, So our job as a 0:18:52.440 --> 0:18:55.120 market maker was we have to give them a competitive quote. 0:18:55.400 --> 0:18:58.439 The problem was is that ETF became really popular and 0:18:58.480 --> 0:19:01.600 everybody wanted a quote all the time. So what we 0:19:01.640 --> 0:19:04.440 did was we found a way to automate the response 0:19:04.800 --> 0:19:07.320 to RFQs a request for quotes. And now if you 0:19:07.359 --> 0:19:09.840 look across the ETF marketplace, if we have advisors on 0:19:09.880 --> 0:19:12.800 the call, if they custody at Schwab or the custody 0:19:12.840 --> 0:19:16.680 at Fidelity, that entire process is automated. They go to 0:19:16.720 --> 0:19:19.440 their block desk at one of those custodial firms, or 0:19:19.440 --> 0:19:21.879 if you're an institution, you go to a custodian or 0:19:21.880 --> 0:19:24.680 a market maker and you can get a nearly instantaneous 0:19:24.720 --> 0:19:28.000 quote back on an ETF block trade, and that's because 0:19:28.000 --> 0:19:32.880 of the automation of the request for quote process. So options, 0:19:32.880 --> 0:19:36.080 it's a relatively similar process in what we're doing. We 0:19:36.119 --> 0:19:38.840 go out there whenever we reset the funds, and we 0:19:38.920 --> 0:19:40.840 use an auction, and we go out to five or 0:19:40.880 --> 0:19:44.479 six different option market makers and we request a quote 0:19:45.359 --> 0:19:49.080 on the options package. And this is a cool caveat. 0:19:49.240 --> 0:19:51.760 We actually trade the options as a package. Instead of 0:19:51.800 --> 0:19:55.240 going out there and trading each individual options, leg Innovator 0:19:55.280 --> 0:19:57.920 goes out and gets a quote on that entire options package. 0:19:58.359 --> 0:20:00.159 And the thing I like to say is that we 0:20:00.160 --> 0:20:03.000 have economies of scale and we actually have the attention 0:20:03.320 --> 0:20:08.280 of these big options market makers like Susquehanna, Old Mission, Goldman, Sachs, 0:20:08.359 --> 0:20:10.920 Jane Street. So what we found is that we're actually 0:20:10.960 --> 0:20:14.960 able to get a significantly higher cap for our investors 0:20:15.320 --> 0:20:16.840 than if they tried to do this on their own. 0:20:17.440 --> 0:20:20.679 And that's what I talked to about with institutions, pensions, endowments. 0:20:21.320 --> 0:20:22.639 We say, you know what, you can try to mimic 0:20:22.680 --> 0:20:25.959 this yourself, but you'll typically get a lower cap than 0:20:26.000 --> 0:20:27.920 you would get if you use the innovative product because 0:20:27.920 --> 0:20:30.280 of our economies of scale. And to top of that, 0:20:30.520 --> 0:20:33.280 David and James, nobody wants to manage options. That's the 0:20:33.280 --> 0:20:37.359 feedback that we've gotten. It's Harry. It creates operational difficulties. 0:20:37.680 --> 0:20:39.639 So if you can get that risk managed exposure in 0:20:39.720 --> 0:20:41.400 the etf rapper, it's a win. 0:20:42.600 --> 0:20:44.439 Yeah, if I find that, Like when I talk with 0:20:44.480 --> 0:20:46.359 people about these, they're like, oh, I can just do 0:20:46.440 --> 0:20:47.840 this myself, And I'm like, go ahead. 0:20:48.920 --> 0:20:50.520