Goldman Sachs makes big bet on ETFs focusing on downside protection

Goldman Sachs Asset Management is making a big bet on defined outcome exchange-traded funds — also known as buffer ETFs, which use options to help protect against market losses.

This month, Goldman Sachs agreed to buy defined outcome ETF provider Innovator Capital Management for $2 billion. The deal is expected to close in next year’s first half.

Bryon Lake, co-head of the firm’s Third-Party Wealth team, expects the funds to be a major growth engine for the industry.

“We did this deal with Innovator. We’ve loved that business for years. We’ve known the founders. We’ve known the team. We’re really excited about this space that they’ve invented, the defined outcome space,” he told CNBC’s “ETF Edge” this week. “Defined outcome, in particular, is a very fast and attractive space to us.”

His reasoning: The ETFs solve particular problems for investors.

“They’re looking for income. They’re looking for downside protection. They’re looking for further growth,” Lake said.

Kathmere Capital Management, which has $3.4 billion in assets under management as of late November, invests extensively in ETFs.

According to the firm’s chief investment officer Nick Ryder, defined-outcome ETFs are used in some client portfolios as part of a stock strategy built to reduce downside risk. They’re used in tandem along with tools like trend-following and covered call strategies.

“There’s both a client demand for these and we also see a role for them in portfolios,” Ryder said in the same interview.

He added the ETFs are so attractive because they’re geared for investors seeking stock market exposure with a built-in safety net.

“Equities go up, and they go down. Over the long haul, they tend to work their way upwards to the right. But we know as through years of experience… the ride is anything but smooth,” Ryder said. “So for us, this category of these risk-managed equity solutions… plays a role in a portfolio, and that’s where our adoption is really driven by.”