Burke Ashenden

Burke Ashenden is the Vice President of Distribution at Innovator ETFs, the firm that pioneered the defined outcome ETF category. Before joining Innovator, Burke worked in the insurance industry, which gives him a useful perspective on how advisors have traditionally solved for downside protection and income certainty. Innovator now manages over $10 billion in assets across their suite of Buffer and defined outcome ETFs.

On this episode, Burke talks with Brad about how Innovator's Buffer ETFs actually work under the hood, why the defined outcome category has exploded past $40 billion in AUM industry-wide, and how advisors are using these products in real portfolio construction.

How Buffer ETFs Actually Work

The core mechanic is straightforward: Innovator buys an options package that provides known downside protection (the "buffer") in exchange for capping the upside over a defined outcome period, typically one year. The flagship products offer a 9% buffer against losses on the S&P 500 (meaning you're protected against the first 9% of decline) with an upside cap that resets each quarter. There's also a 15% buffer series and a 30% buffer series. The deeper the protection, the lower the cap.

What makes Innovator different from other buffer product providers is that they were first to market and have built out the most complete product lineup. They offer monthly series across multiple buffer levels, so an advisor can enter a position any month and get a fresh outcome period. Burke explains that the options used are FLEX options, which are exchange-listed, cleared through the OCC, and have zero counterparty risk. This was a deliberate design choice to differentiate from structured notes, where the buyer takes on the credit risk of the issuing bank.

Burke walks through a practical example: if the S&P 500 drops 12% during a quarterly outcome period and you're in the 15% buffer product, you lose nothing. If it drops 20%, you lose 5% (the amount beyond the 15% buffer). If the S&P is up 20% and the cap is 14%, you keep 14%. The fund resets each quarter, giving you a new buffer and new cap based on current options pricing.

Why the Category Has Exploded

Burke attributes the growth of defined outcome ETFs to a fundamental shift in how advisors think about portfolio construction. For decades, the standard answer to downside protection was bonds. With the 60/40 portfolio under pressure and bond yields not compensating for the risk taken in 2022, advisors started looking for alternatives. Buffer ETFs let them stay invested in equities with a known floor on losses, which is something bonds couldn't reliably deliver during the rate hiking cycle.

He also points to the behavioral dimension. When markets get volatile, the hardest conversation for an advisor is talking clients out of selling everything and going to cash. Buffer ETFs give advisors a tool to say: "You're protected against the first 15% of decline, so let's stay in the market." That conversation is dramatically easier when there's a quantifiable floor on the downside. Innovator's own data shows that their products see significant inflows during periods of elevated VIX, exactly when you'd expect advisors to be looking for protection.

Portfolio Construction: How Advisors Actually Use Them

Burke says the most common use case is replacing some portion of the fixed income allocation with a buffer ETF. An advisor might move 15-20% of a 60/40 portfolio out of bonds and into a 15% buffer product, getting equity upside participation with defined downside protection. Some advisors use a "buffer ladder" strategy, owning products with different outcome periods so they have staggered reset dates throughout the year. This approach smooths out the timing risk of entering a single outcome period.

For more conservative clients, the deep buffer (30%) products are positioned as bond alternatives. They won't capture much equity upside, but the 30% downside protection means a client would need to see a truly catastrophic market decline before experiencing any loss. Burke notes that during 2022, when the S&P 500 fell roughly 19%, the 30% buffer products showed positive returns for the full year since the decline never breached the buffer.

Key Takeaways

• Innovator manages over $10 billion across their defined outcome ETFs, with the broader category surpassing $40 billion industry-wide.
• Buffer ETFs use FLEX options cleared through the OCC with zero counterparty risk, unlike structured notes that carry the issuing bank's credit risk.
• The most common advisor use case is replacing 15-20% of a fixed income allocation with buffer ETFs, providing equity upside with quantified downside protection.
• Innovator's 30% buffer products showed positive returns during 2022 despite the S&P 500 falling roughly 19%, since the decline never breached the buffer level.
• Monthly and quarterly series let advisors build "buffer ladders" with staggered outcome periods to reduce timing risk on entry points.

Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.