A new ETF offers ‘travel insurance’ for footloose American capital jetting off to other developed markets.

Innovator Capital Management floated the Innovator International Developed Power Buffer ETF – September (ISEP) on the NYSE Arca on September 1. ISEP is designed to protect investors against large losses in developed markets around the globe, ex-North America. 

It does this by aiming to track the iShares MSCI EAFE ETF (EFA), a fund comprising large- and mid-cap stocks from markets like Europe, Japan, Australia, and others. Currently, ISEP caps gains at 19.3% while shielding against the first 15% of losses over a specified period. As each outcome period ends, the ETF resets roughly annually and can be held indefinitely.

Innovator – which manages dozens of leveraged and managed outcome funds – makes no guarantee that outcomes for a period will be realized, however.

EFA – the Blackrock index ISEP tracks – launched in 2001 and has around $48 billion in assets under management (AUM). The fund holds diverse blue chip stocks worldwide in various industries.

Swiss food conglomerate Nestle, Japanese carmaker Toyota, Dutch lithography machine builder ASML, and British oil major Shell are all among the top ten holdings, with weighted allocations exceeding 1%. Yet no holding is much higher than 2%, and with over 800 stocks in the fund in total, the stocks are spread thinly, making it highly diversified.

Developed Edge 

There is a bull case for moving money into advanced countries right now. Developed economies have had a strong year, including those outside the U.S.  

European stocks have done well in 2023, with Germany’s DAX 30 up 13% year-to-date. Japan has also had a stellar year – with the Nikkei 225 reaching historic highs in June. 

While mature market EFA has gained roughly 9% year-to-date, the iShares MSCI Emerging Markets ETF (EEM) has only gained roughly 3.5%. 

Developed economies are inherently more stable than emerging ones. Since 1988, for instance, the standard deviation for the purely developed market MSCI World Index was 7% lower than emerging market indexes. Developed economies also have a lower correlation with the emerging world, so investors may see less of a drawdown if economic malaise hits other geographies, which can provide investors some shelter.

In assessing the potential of ISEP, investors will want to evaluate the stability and growth potential of mature markets against their emerging counterparts. They’ll also want to keep in mind that in investing in ex-North American markets, they could be leaving money on the table. 

“There is only so much investment capital to go around and it has all been channeled into U.S. growth stocks,” Morningstar’s Mark Preskett told the Financial Times recently. He said a change in the “perceived exceptionalism of U.S. growth stocks” would need to occur before more capital flowed to emerging markets.

iShares MSCI EAFE ETF (EFA) is trading around $71, having gained roughly $4-5 in value year-to-date. 

ISEP fund has an expense ratio of 85 basis points.

Previously published at Wealth of Geeks

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