The Aug. 1 debut of two more ETFs offering 100% downside protection in exchange for caps on upside performance underscores the growing appeal of defined outcome funds, a fledgling category that has attracted approximately $1.3 billion in less than 18 months.

The Innovator Equity Defined Protection ETF 1-Year August (ZAUG) and the Calamos S&P 500 Structured Alt Protection ETF – August (CPSA) each extend the 100% downside protection series of the respective ETF issuers. As with any ETF offering full or limited downside protection, the price for that insurance is paid in the form of capped upside performance.

ZAUG, which charges 79 basis points, caps the upside performance over the 12-month life of the ETF at 8.82%. CPSA, which charges 69 basis points, caps the upside at 8.74%.

Demand among wealth managers for the ETF structure, which employs options to replicate the performance of an underlying stock index, has risen because of its appeal to older and risk-averse investors.

Matt Kaufman, head of ETFs at New York-based Calamos Investments, said the so-called defined outcome ETFs are starting to stack up favorably against such portfolio management stalwarts as Certificates of Deposit and annuity products that offer similar performance buffers.

“When you offer 100% protection you can unlock conservative bond portfolios and tap into some of the money sitting in cash,” he said.

As ETFs with 12-month lifespans, the structure is often compared to that of a 1-year Treasury bond, which is paying a yield of 4.78% on Aug. 1.

Kaufman compares that 12-month risk-free yield to an upside cap of nearly 9%, which sounds attractive. But it is important to understand that one is virtually guaranteed, and one is dependent on where the benchmark S&P 500 Index is at 12 months from today.

ETF Investors Seek Downside Protection

Most issuers of defined outcome and buffered ETFs offering degrees of downside protection insist the capped performance is less important to risk-averse investors than is the downside protection. It is for that reason these ETFs are sometimes referred to as “Boomer Candy.”

“A large part of the demand for these products has been from investors looking to put sidelined cash to work as the stock market hovers around all-time highs,” said Bruce Bond, chief executive of Innovator Capital Management in Wheaton, Ill.

The upside performance cap is determined both by the amount of downside protection provided and the cost of the options necessary to offer that protection.

In essence, if the yield on the risk-free Treasury bond falls, the upside cap on the next ETF in the series will also be lower.