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

As the financial markets continue to evolve, new investment tools are emerging to help investors balance growth and risk. One such tool is the Innovator International Developed Power Buffer ETF - October (IOCT). If you are seeking stability combined with international market exposure, IOCT may offer a solution. This blog post will introduce IOCT and explore its advantages, disadvantages, and investment strategies.

What is IOCT?

IOCT is an ETF designed to provide investors with exposure to international developed markets while offering a buffer against downside risks.

IOCT stands for Innovator International Developed Power Buffer ETF - October. Launched by Innovator ETFs, IOCT aims to hedge against losses by using options strategies, offering a unique way to approach international markets with less risk.

Key Features of IOCT

• International Developed Market Exposure: IOCT invests in a portfolio that aims to mirror the performance of the iShares MSCI EAFE ETF.
• Buffer Against Losses: The ETF provides a 15% buffer against market downturns for one year, starting each October.
• Defined Outcome Period: The investment strategy resets annually in October, affecting how gains and losses are realized.
• Expense Ratio: IOCT has an expense ratio that reflects the cost of implementing its options strategy.

IOCT Composition

IOCT primarily includes large-cap stocks from developed markets outside the U.S., such as Europe, Australasia, and the Far East. The buffer mechanism is created through a combination of options on the iShares MSCI EAFE ETF, enabling IOCT to offer downside protection up to a certain threshold while capping upside gains.

Pros of IOCT

Downside Risk Mitigation

One of the most significant advantages of IOCT is its buffer against losses. This feature can protect your investments from the first 15% of losses over a one-year period, providing peace of mind in volatile market conditions.

Global Diversification

IOCT offers exposure to international developed markets, which can be an essential component of a diversified investment portfolio. By investing in stocks outside the U.S., you can mitigate country-specific risks and benefit from global economic growth.

Defined Outcome

The structured approach and the annual reset provide investors with a clear understanding of potential risks and rewards. Knowing that there is a cap on gains and a buffer on losses allows for more predictable investment outcomes.

Cons of IOCT

Limited Upside Potential

The buffer against losses comes with a trade-off: a cap on the upside potential. If the underlying index experiences significant gains, your returns will be capped, meaning you won't fully benefit from those gains. This can be a drawback in strong bull markets.

Relatively High Expense Ratio

The options strategies used to create the buffer involve higher costs, which are passed on to investors via the expense ratio. While offering valuable protection, the higher expenses can erode long-term returns, especially in less volatile markets.

Complexity

Understanding how IOCT works can be challenging for beginner investors. The use of options strategies, defined outcomes, and the annual reset mechanism requires a good grasp of financial concepts. This complexity might deter some investors from including IOCT in their portfolios.

IOCT Investment Strategies

Despite its complexity and capped gains, IOCT can be a valuable tool for certain investment strategies, particularly for those seeking stability amidst international market exposure.

Long-term Investment Strategy

For investors with a long-term horizon who are interested in international exposure but are concerned about market downturns, IOCT offers a solution. Its buffer can help mitigate losses during market turbulence, making it easier to stay invested for the long haul.

Incorporating Into a Diversified Portfolio

Include IOCT as part of a broader investment strategy to achieve diversification. By combining it with other assets that have higher growth potential, such as U.S. equity ETFs, you can strike a balance between risk and reward.

Supplementing Retirement Portfolios

For retirees or near-retirees, capital preservation becomes crucial. IOCT can be a valuable addition to a retirement portfolio by providing international market exposure while limiting downside risk. Its structured outcome approach aligns well with the need for predictable returns during retirement.

Conclusion

IOCT offers a unique proposition for investors seeking international exposure with reduced risk. Its buffer mechanism, designed to protect against the first 15% of losses annually, provides a safety net during volatile market periods. However, the capped upside and higher expense ratio are essential considerations.

Whether you are planning a long-term investment or seeking to diversify your portfolio, IOCT can be a useful tool when used correctly. By incorporating it into a well-rounded investment strategy, you can take advantage of global market growth while protecting your investments from significant downturns.