BALT ETF Review: Financial Gymnastics with Little Value

The Innovator Defined Wealth Shield ETF (BALT) aims to track the SPDR S&P 500 SPY ETF's return, with a ceiling and a 3-month 20% downside barrier. However, the fund's financial gymnastics do not provide much value, making it not worth the investment.

The Innovator Defined Wealth Shield ETF (BALT) is an interesting fund that aims to track the return of the SPDR S&P 500 SPY ETF, with a ceiling and a 3-month 20% downside barrier. This ETF is designed to provide investors with some market growth while offering protection against significant losses. However, a closer examination reveals that the fund's financial gymnastics do not provide much value, making it potentially not worth the investment.

Fund Details and Strategy

BALT is an ETF with an asset under management (AUM) of $1.3 billion and an expense ratio of 0.69%. The fund uses a strategy of buying and selling options to mimic the returns of SPY while providing a 20% downside barrier over a 3-month period. This strategy involves trading FLEX options, which are customizable but can face higher illiquidity risks. The fund resets at the end of each quarter, and investors must hold shares for the entire outcome period to realize the full benefits.

Risk and Return Profile

The fund's return profile is designed to provide downside protection but with limited upside potential. If SPY drops by more than 20%, BALT investors lose less than SPY investors. However, if SPY increases, BALT investors are capped at a maximum return, which is currently set at 2.47%. This cap means that investors will not see the full gain if the markets experience a significant run.

Risks

There are two major risks associated with BALT. First, the 20% downside protection can be breached, as seen in the past century. While this is rare, it is possible. Second, the fund's strategy caps the upside, meaning investors may lose out on potential gains if the markets perform well. These risks should be carefully considered by investors.

Comparison with SPY

Investing directly in SPY is generally recommended over BALT due to its lower cost, higher liquidity, and lower risk. SPY is composed of the largest 500 companies in the US and has a low expense ratio of 0.0945%. It is also less volatile than single-name stocks and has a long track record of increasing in value over the long term. Investors can also sell calls on their SPY position to generate additional income.

Conclusion

While BALT offers some protection against downturns in SPY, its financial gymnastics do not provide significant value. The fund's high expense ratio, limited upside potential, and the risk of breaching the 20% downside barrier make it less attractive compared to investing directly in SPY. For investors looking to gain exposure to the S&P 500 with downside protection, a high-yield CD might be a better option.

References:

[1] https://seekingalpha.com/article/4790740-balt-financial-gymnastics-for-little-value-not-worth-it

[2] https://api.news.bitcoin.com/wp-json/bcn/v1/post?slug=etf-weekly-recap-euphoric-week-for-bitcoin-and-ether-funds-with-3-billion-in-combined-inflows