What is BSEP? (Pros, Cons, and Strategies)

In the ever-evolving world of ETFs, Innovator U.S. Equity Buffer ETF - September (BSEP) has emerged as a unique offering designed to provide a buffer against market uncertainties. For investors seeking protection while still participating in market gains, BSEP can be an intriguing addition to their portfolio. In this blog post, we'll delve into what BSEP is, its advantages, disadvantages, and some strategies for effectively incorporating it into your investment plan.

What is BSEP?

BSEP is an ETF managed by Innovator Capital Management, designed to provide investors with exposure to the S&P 500 while offering a downside buffer. This ETF is relatively new in the market but has generated interest due to its innovative approach to risk management.

Key Features of BSEP

• Buffer Against Losses: BSEP provides a downside buffer of 9% over a one-year period, meaning it aims to protect investors from the first 9% of losses in the benchmark index.
• Defined Outcome Periods: Each series of BSEP has a defined outcome period of approximately one year, after which the buffer and cap are reset.
• Cap on Gains: To compensate for the downside buffer, BSEP also has a cap on the potential upside returns, which varies with market conditions but is predefined at the start of each outcome period.

This ETF is part of the Innovator Defined Outcome ETFs suite that focuses on mitigating risk while still providing exposure to equity markets.

BSEP Composition

The BSEP portfolio primarily includes options on the S&P 500. By utilizing a combination of put and call options, BSEP aims to achieve the desired buffered outcome. This strategy makes BSEP notably different from traditional equity ETFs that directly invest in stocks.

Pros of BSEP

Downside Protection

One of the primary selling points of BSEP is its buffered strategy, which provides protection against the first 9% of losses over a 12-month period. This feature is particularly appealing during uncertain market conditions, as it allows investors to stay invested without fearing large losses.

Defined Outcomes

Investors know in advance the exact exposure and risk mitigation BSEP provides for each outcome period. This transparency helps in better planning and making informed investment decisions.

Portfolio Diversification

BSEP offers a unique way to diversify a portfolio, particularly for conservative investors looking to mitigate risks associated with equity investing. By adding an element of downside protection, BSEP can complement more traditional equity holdings.

Cons of BSEP

Limited Upside

Due to the structured capped gains, BSEP doesn’t allow capturing the full upside of the S&P 500. For high-risk, high-reward investors, the cap on potential returns might be a significant drawback.

Complexity

The use of options to achieve the defined outcome might be complex for average investors to understand. This can make it difficult for investors to grasp the full range of potential outcomes and risks involved.

Short-term Focus

With each series resetting annually, BSEP might not align well with long-term investment horizons. Investors must be vigilant about the terms and conditions renewing each year, adding a layer of management complexity.

BSEP Investment Strategies

Given the unique characteristics of BSEP, it is crucial to adopt suitable strategies for incorporating it into your investment portfolio.

Complementary Investment

BSEP can serve as a complementary investment to traditional equity ETFs. By providing a buffer, it can offset some of the risks associated with more volatile assets in your portfolio. Combining BSEP with high-cap growth stocks, for instance, can strike a balance between risk and reward.

Risk Mitigation

For investors worried about market downturns, BSEP can be a protective allocation within a broader equity portfolio. Its 9% downside buffer can reduce overall portfolio volatility without entirely forgoing market participation.

Tactical Allocation

BSEP can be used tactically during periods of expected market volatility. For example, if economic indicators suggest a potential downturn, increasing the allocation to BSEP can provide peace of mind while still allowing some participation in potential market gains.

Conclusion

BSEP offers a unique approach to ETF investing by providing downside protection while allowing for equity market participation. Its defined outcome feature makes it transparent but also imposes limitations on potential gains. Understanding these dynamics is crucial for effectively incorporating BSEP into your investment strategy.

For conservative investors seeking to mitigate risks or those looking to diversify their strategies with a defined outcome ETF, BSEP can be a valuable tool. However, it’s important to weigh its benefits against the limitations to ensure it aligns with your overall investment goals.