Animal Spirits: Talk Your Book - Making Money When Stocks Are Up or Down

Date: September 22, 2025
Hosts: Michael Batnick & Ben Carlson
Guest: Graham Day, CIO of Innovator ETFs

Episode Overview

In this episode, Michael and Ben sit down with Graham Day, CIO of Innovator ETFs, to discuss the rise of "dual direction" defined outcome ETFs—funds designed to generate gains when the S&P 500 goes up (to a cap) or down (within certain limits). The conversation dives deep into how these products work, the behavioral and practical reasons for their popularity, and how they aim to address investor concerns about both upside and downside scenarios. The trio also explores how these ETFs fit into portfolios, compare to traditional allocations, and what makes their structure appealing to both clients and advisors.

Key Discussion Points & Insights

1. The Defined Outcome ETF Space & Investor Demand

• Growth and Popularity:

  • The hosts highlight the explosive demand for products that blend equity-like exposures with some protection or predictability—structured notes, annuities, and increasingly, defined outcome ETFs.
  • Despite concerns of overlap or competition, both insurance-style products and ETFs are growing, reflecting high demand among advisors and investors.
    • “There is just a huge demand from advisors and investors for this type of product.” — Michael [00:43]

• Behavioral Perspective:

  • The appeal is as much psychological as quantitative: people desire certainty in outcomes, especially after market shocks.
    • “I think that doesn't take into account the behavioral aspect... It's very hard to get that in the investing world.” — Ben [02:08]

2. What Is a Dual Direction Buffer ETF? (with Graham Day)

• Basic Structure:

  • Provides upside participation to a capped level (e.g., 8.7% in a recent 15% buffer product) and, crucially, offers a one-to-one positive return if the S&P 500 falls—up to a set downside threshold (e.g., 15%).
  • After the threshold, it functions as a buffer, absorbing a fixed chunk of losses, but not providing further positive returns as the market keeps falling.
    • “If the market's down 10 in one year, you're up 10%.” — Graham [09:35]
    • “If the S&P is up 6, you're up 6. If the S&P is up 10, you hit your performance cap of 8.7%.” — Graham [07:09]

• Timeframe and Mechanics:

  • Most products use a 12-month “outcome period”—the defined participation and buffer mechanics are delivered at the end of the period, not on a daily basis.
  • The ETF tracks the S&P 500’s price (not total return) with its unique “option stack” approach.
    • “To realize the full dual direction benefit, the full upside cap, it's over the entirety of the one year outcome period.” — Graham [08:04]

3. Interplay of Upside, Downside, & Buffers

• How the Buffer Works:

  • Example: In a dual direction 15% buffer ETF, if the S&P falls up to 15%, the ETF rises by the same percentage. Beyond 15%, it absorbs a fixed level of losses (the buffer); additional market losses beyond that reduce the ETF’s value beyond the buffer’s protection.
    • “At the 15% level, it switches from the dual direction to a buffer.” — Graham [10:50]
    • “If the market is down 20, you're down 5.” — Graham [11:25]

• Transition Point Explained:

  • The “flip” from gains to buffer protection isn’t always linear—there’s a rapid transition in performance from up 15% to down 1% as the S&P 500 crosses the -15% to -16% threshold.
    • “From minus 15 to minus 16... that's the transition from a dual direction down to a buffer.” — Graham [15:55]

• Historical Examples:

  • Referencing historical drawdowns (like 1962–63), the ETF would have performed better in moderate declines, illustrating the potentially substantial “upside” in bear markets up to the threshold, but cautioning about sharp drops beyond that.

4. Where Dual Direction ETFs Fit in Portfolios

• Not a Stock Market Replacement:

  • These products are meant for conservative or “risk-managed” allocations—competing more with bonds or structured notes than with equities themselves.
    • “I would assume, not a stock market replacement. This is your more conservative allocation, fixed income.” — Ben [21:45]
    • “How many strategies are out there that give you true inverse performance to the S&P 500? There’s none.” — Graham [22:23]

• Why Not Daily or Shorter Timeframes?:

  • One-year periods resonate with advisors and clients; daily resets would be impractical for communication and tax purposes, though shorter periods could emerge in the future.

5. Tax Efficiency and Comparison to Other Products

• ETF Structural Benefits:
  • Defined outcome ETFs avoid the credit risk of structured notes and annuities (as ETFs use centrally cleared options).
  • Tax deferral: Investors only pay taxes when selling, unlike taxable events for notes/annuities at maturity.
    • “The ability to say, hey, look, we're not going to pay any taxes on these products until we decide to sell. That is a huge value add.” — Graham [25:49]

6. Model Portfolios & Advisor Adoption

• Innovator’s In-House Models:
  • Innovator now offers in-house model portfolios blending these ETFs, aiming to offer a more “defined outcome version” of traditional stock/bond allocations.
    • “We have a team internally that’s been building that business out because...advisors want an easy-to-implement solution.” — Graham [29:38]

Notable Quotes & Memorable Moments

• On Quant Critiques:
  “Yeah, shut up, dork. Nobody cares.” — Michael, jokingly about critics who focus on more ‘optimized’ but less accessible strategies [02:06]

• On Structure & Communication:
  “We want them to understand that really the dual direction benefit really stops at minus 15. That's...why I think advisors have trusted us—the way we communicate what the products do, we're always going to be as conservative and straightforward as possible.” — Graham [17:04]

• Behavioral/Practical Riff:
  “I didn't realize we were talking to the fun police.” — Michael, as Ben asks about tax timing [09:30]

• On Market Sentiment:
  “92% [of advisors] say over the next year the S and P is not going to return more than 10%. That's more bearish than we've...That’s how you know it’s not going to be.” — Graham & Michael [22:23–23:58]

Timestamps for Key Segments

• [04:10] Are new ETFs client-driven or innovator-driven?
• [07:09] How dual direction buffer ETFs work (upsides and downsides explained)
• [09:35] Real-world examples: What happens if the market is down/up certain percentages?
• [11:25] Buffer flip, when you stop making money in a falling market
• [15:55] Historical hypothetical returns, transition zone between dual direction and buffer
• [22:23] Where do advisors use these? Bond/stock alternatives, diversifiers
• [25:49] Tax deferral benefits compared to annuities & notes
• [29:38] Model portfolios and their adoption among advisors

Closing Thoughts

This episode provides a comprehensive overview of how defined outcome and dual direction ETFs work, why they’re popular, and how they can be used as tools by advisors aiming for more predictable outcomes for clients worried about both downside and upside in uncertain times. Innovator’s focus on clear communication and behavioral finance, combined with product structure, sets them apart. The talk is insightful for both seasoned professionals and individual investors curious about new ways to manage market risk.

Further resources:

• Innovator ETFs: In-depth product sheets and examples.
• For episode questions, email: animalspirits@thecompoundnews.com