🛡️BALT: The ETF That Buffers Your Wealth

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Welcome to another edition of our newsletter, where we explore innovative ways to structure your portfolio. Today, we’re focusing on an intriguing ETF: the Innovator Defined Wealth Shield ETF $BALT ( 0.0% ) . This ETF is a hybrid—equity-based with a built-in protective layer. If you’ve been looking for a way to gain exposure to U.S. equities while managing downside risk, BALT offers a refreshing approach.

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What is BALT?

At its core, BALT seeks to track the performance of the SPDR S&P 500 ETF while providing a buffer against losses over a quarterly period.

• 🛡️Downside Protection: It aims to absorb the first ~20% of SPY's losses each quarter, helping to limit your downside risk during market declines.

• 🧱Upside Potential with a Cap: While you benefit when the market rises, your potential gains are capped, meaning you may not capture all of SPY's rally during a strong upswing.

• 📈Pure Equity Focus (No Bonds): The fund holds no bonds, eliminating direct interest-rate or credit risk. Its strategy is implemented entirely through an options overlay on equities.

The ETF uses FLEX Options (Flexible Exchange Options) to achieve its objectives by customising its risk-return profile. BALT actively manages a portfolio of these options linked to SPY, allowing for price returns from the S&P 500 ETF Trust up to a set cap, along with partial downside protection. The fund refreshes its buffer and cap levels every three months, enabling investors to hold it long-term while keeping consistent risk parameters.

Investment Strategy📊

For ETF UNO readers looking to incorporate BALT into their investment strategy, there are several thoughtful approaches to consider:

• 🌌Core-Satellite Approach: BALT can serve as a "satellite" holding (10-20% of equity allocation) alongside traditional broad-market ETFs. This combination provides exposure to the full market upside through the core holdings while adding downside protection through BALT's buffer mechanism.

• 💹Fixed Income Alternative: For investors concerned about interest rate risk in bond portfolios, BALT offers an intriguing alternative. Since it doesn't hold fixed-income securities, it eliminates duration risk while still providing lower volatility than pure equity exposure. This strategy makes it particularly relevant in today's uncertain interest rate environment.

• ⏰Tactical Allocation Tool: Market timers can use BALT during periods of heightened volatility or when technical indicators suggest potential market weakness. The quarterly reset feature allows investors to "set it and forget it" for three-month periods, reducing the need for constant monitoring and adjustment.

• 🗓️Retirement Income Strategy: For retirees or those nearing retirement, BALT can help preserve capital during market downturns while still participating in market gains. The predictable quarterly reset schedule aligns well with distribution planning and provides psychological comfort during turbulent periods.

BALT is most effective as part of a diversified portfolio, not as a standalone investment. It enhances traditional asset classes, leading to a more resilient portfolio. The key is to find the right allocation based on your risk tolerance, investment timeline, and current market conditions.

BALT at a glance

ETF Issuer: Innovator

Inception: 2021-07-01

Asset Class: Equity (with Options)

Underlying Index: S&P 500 Index (with 20% buffer)

Geographical Focus: U.S.

Expense Ratio: 0.69% (as of last data point)

Dividend Yield: N/A (as of last data point)

Distribution Frequency: N/A

Historical Performance

Since its inception, BALT has shown its value during market stress, achieving an average annual return of about 5.90%.

The fund aims to limit downside risk while offering some upside potential. However, its upside cap may cause it to underperform the pure U.S. large-cap index during strong market conditions. In significant market downturns, BALT's buffer can help, as seen in 2022.

For risk-conscious investors, the trade-off is evident: less upside in strong markets, but a smoother ride during turbulent times.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Built-in Downside Protection: In an environment where equity valuations are elevated and macro risk remains, many investors worry about large drawdowns. BALT offers a defined (target) ~20 % buffer per quarter — a tangible way to manage downside risk (if you hold through the period). For someone using equity exposure as a growth engine, this buffer can provide emotional and practical relief during big dips.

2. Equity Exposure with No Interest-Rate/Credit Risk: Traditional defensive assets are often fixed income: bonds, high-grade credit, etc. But in periods of rising rates or inflation concerns, bonds may not deliver the expected defence. BALT offers equity exposure (growth potential) without the interest-rate or credit risks inherent to bonds.

3. Portfolio Diversification and “Defensive Equity” Role: Because BALT behaves differently than pure equities (due to its buffer/cap structure), it can diversify a portfolio’s risk profile. You could view it as a sleeve between “growth” and “defence” — supporting a modern “60/40” replacement strategy or a layered approach where you allocate some to standard equities, some to BALT, some to alternative diversifiers.

Top 3 Reasons Not to Invest

1. Capped Upside Potential: BALT is a unique ETF that protects against SPY downturns of up to ~20% while also capturing limited upside. During strong bull markets, this cap on returns can significantly underperform traditional equity investments. For long-term investors with high risk tolerance and decades until retirement, this limitation may outweigh the benefits of downside protection.

2. Complexity and Liquidity Concerns: FLEX Options are powerful but may be less liquid than standard options, potentially leading to tracking challenges and higher transaction costs. This complexity makes BALT less appropriate for novice investors who favour straightforward, transparent investment vehicles, as understanding defined-outcome strategies requires more financial sophistication than traditional ETF investing.

3. Variable Buffer Levels: The ETF aims for a 20% buffer, but it may actually range from 15% to 20%, with no guarantee of consistency. This variability means investors cannot rely on a precise 20% buffer each quarter, as the actual buffer level is influenced by market conditions at the start of each period, introducing uncertainty.

⚖️BALT: Upside Participation vs. Downside Protection

BALT is a valuable ETF for investors seeking equity exposure with a defensive strategy. It offers potential large-cap U.S. equity gains (via SPY), a target 20% buffer on quarterly losses, and no traditional fixed-income risk. For the ETF UNO community, which emphasizes smart, diversified portfolios, BALT serves as an innovative option for the equity portion of their investments.

As we've detailed:

• This strategy is well-defined but involves trade-offs, such as a cap on potential gains and an uncertain buffer.

• Historical performance shows smoother returns and lower volatility, but also reduced upside compared to full equity exposure.

• BALT can be used as an alternative or supplement to fixed income, as a buffer in a layered portfolio, or as a tactical adjustment during uncertain market conditions.

• Consider both the benefits and limitations, including the upside cap, timing, costs, and structural complexity.

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DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.