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New ETFs from Innovator Capital aim to limit losses in down markets

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Bruce Bond is back. Along with his PowerShares co-founder John Southard, Bond is hoping that ETF lightning will strike twice with their latest venture, Innovator Capital Management.

They’re hoping to shake up the industry with a better mouse trap. “I’ve always believed, even when I started PowerShares, that your products have to be unique,” he says. Starting in January, Innovator will launch a series of “defined outcome” ETFs. These structured products will resemble annuities, but without the cost and lockup features of those insurance products. The ETFs will be designed to match or beat the stock market with limited downside risk.

Innovator plans a suite of four ETFs with different risk/reward profiles. One, for example, would provide enhanced upside (subject to a cap), while eliminating the first 10% market drop. So if the market were to decline 11% over the course of the year, the holder’s loss would be only one percent. For investors fearing the worst, another version would limit losses to 5% and protect down to a 35% decline over the year.

Although investors will be able to sell the ETFs in the secondary market at any time, those who hold for the full year will see the collars reset. Innovator also plans to launch a similar suite of four ETFs each quarter next year.

The firm, which Bond and Southard acquired in May, already offers the Innovator IBD 50 ETF (ticker: FFTY), which tracks an index of stocks using Investor’s Business Daily’s CAN SLIM methodology, a system that uses multiple factors, including earnings momentum, to select stocks likely to outperform.

As he did when he started PowerShares, Bond initially will pitch his new products to solo practitioners in the planning community. That eliminates the problem of “gatekeepers” in larger operations who may be reluctant to try new concepts. “As the products get a little traction, a little history, I think we’ll be able to get them into the larger firms,” says Bond, the CEO of Innovator.

In 2002, Bond co-founded PowerShares after stints at First Trust and Nuveen. By the time he sold PowerShares to Invesco in 2006, the firm had $3.5 billion in assets under management. But the ETF industry is much larger than when Bond sold his last company. In 2006, the entire U.S. ETF universe held about $300 billion in assets. This year alone, inflows will likely exceed that figure.

Even so, Bond is optimistic. “I don’t look at it that much differently than when we started the first time,” he says. Though he does admit “there’s a lot more competitors.”

Asked where he would like Innovator to be in a year, Bond says he would be pleased with 20 ETFs and $1 billion in assets. He’s got a good head start. FFTY, which had about $30 million in assets when he bought Innovator in May, now has about $260 million in the fund. Bond switched the ETF from active management to passive to improve tax efficiency and increased advertising. Superior performance over the past year also didn’t hurt.

The key to success in the ETF market, says Bond, is to offer investors and their advisers something that they can’t find elsewhere. If you do that, he adds, “I think you can do well.”

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