New Cerulli research finds that significant tailwinds such as home-office approvals at large broker/dealers could accelerate asset growth in the Defined Outcome exchange-traded fund (ETF) category to a 29% to 35% five-year compound annual growth rate (CAGR). In the more optimistic scenario, Defined Outcome ETFs™ are projected to more than quadruple over a five-year period, reaching more than $334 billion assets under management by 2030¹. If achieved, this growth would significantly outpace the growth of the broader ETF industry, which is expected to grow at a 15% rate during the same period, according to the white paper, The Future of Outcome-Based Investing: How Defined Outcome ETFs™ Are Poised for Rapid Growth, released in partnership with Innovator Capital Management, LLC (Innovator).

The rapid growth of Defined Outcome ETFs™ aligns with a broader transformation in the wealth management industry. Advisors are moving toward fee-based advisory models that emphasize scale and personalization and they are adopting products that align with both objectives. At the same time, a growing segment of Baby Boomers (who control $48 trillion, more than half of investable assets in the U.S. market) are entering retirement, transitioning from asset accumulation to decumulation. As they transition, Cerulli believes there will be increased demand for predictability, downside protection, and flexibility, reshaping how advisors approach risk management. “Traditional risk mitigation strategies offer diversification and stability, yet they often fall short on providing the certainty that clients increasingly seek,” says Daniil Shapiro, director.

The research outlines several use cases important to advisors and focuses on how each applies to wealth managers.

Defined Outcome ETFs™ aim to offer the following characteristics:

• Volatility Dampener: Provides a level of certainty to clients based on buffer level if held for the entire Outcome Period, potentially helping risk-averse clients remain invested by dampening volatility

• Downside Risk Protection: Offers a level of downside protection for advisors aiming to manage cash flow. In exchange, shareholders forego gains beyond the stated cap.

• Market Participation: Boosts potential equity market growth exposures, up to a cap, for near-retirement age clients overweighted to fixed-income sleeves; however, prospective investors should be willing to hold shares for the entire outcome period in order to achieve the stated outcomes

• Cost Effectiveness: Lower cost compared to structured products

• Enhanced Liquidity: Increases liquidity through the ETF wrapper compared to legacy downside protection products, such as structured notes

The wide range of buffer levels and upside exposures offered by Defined Outcome ETFs™ enable advisors to tailor strategies to each client’s needs. “As market uncertainty persists and investor expectations evolve, Defined Outcome ETFs™ have emerged as a dynamic solution for delivering personalized risk management at scale. Advisors increasingly turn to these products to offer more predictable outcomes and help clients remain invested, especially those concerned about volatility and downside risk,” comments Graham Day, EVP, CIO of Innovator.

Advisors consistently highlight the behavioral benefits of Defined Outcome ETFs™ in helping clients remain invested during periods of market volatility; however, home-office executives cite concerns such as product complexity and slowing platform adoption. For example, should an investor purchase ETF shares that have appreciated since the start their outcome period, they may not be able to realize the full extent of the starting cap and will be exposed to downside until the ETF has returned to its price at the start of the outcome period. “Executives want to see how these products would perform through a significant market drawdown to better understand and grow comfortable that the products would perform the way they were designed,” comments Shapiro. “Issuers that can satisfy these concerns through product innovation and advisor and home-office education will unlock a significant addressable market for the product.”

Source: Cerulli