New ETF Targets Stocks on the Verge of Making It Big

In the investment world, timing is everything. Get in on the ground floor with an investment in a company that sees its value skyrocket, and you can become dramatically more wealthy in a short period of time. However, the majority of the time, most investors get the sense that an investment opportunity has come and gone by the time they are aware of it. Innovator Capital Management is attempting to provide a solution to this problem with one of its most recent exchange-traded fund (ETF) offerings. The Innovator IBD Breakout Opportunities ETF (BOUT) attempts to pinpoint stocks that are about to "break out" and see rapid gains.

BOUT is a passive strategy ETF that holds a basket of stocks the fund managers believe are "poised to break out," according to the issuer, per ETF.com. While the idea of investing in stocks that are about to make it big is an attractive one, the key to the success of this strategy is in its methodology. How does the fund go about selecting stocks that are about to become significantly more valuable before they become popular?

In order to isolate target stocks, BOUT's fund managers look at relative price strength by ranking securities. Those names that the fund believes will be most likely to experience sustained price growth also receive the heaviest weights in the basket.

Chief content officer for IBD Chris Gessel explained that "the IBD Breakout Stocks Index begins by identifying with companies that have strong fundamental indicators and uses a chart pattern recognition algorithm to select stocks for inclusion that are at or nearing breakout points." (See also: The Anatomy of Trading Breakouts.)

In order to best stay on top of what is happening in the market, BOUT rebalances its mix every week. When it was launched in mid-September of 2018, the fund held 56 different stocks. That total could change from week to week, although the fund must maintain at least 25 stocks at all times.

Innovator hopes that its selections will live up to their growth potential. CEO of Innovator Capital Management Bruce Bond explained that, "while many ETFs focus on stocks with established momentum, BOUT seeks to identify companies before they have established momentum, and may offer investors unique exposure that can be utilized as an alternative or complement to momentum ETFs." This strategic component could prove key for BOUT investors as the fund proceeds – it could be a useful counterbalance against other types of ETF strategies. (For more, see: 4 Ways to Use ETFs in Your Portfolio.)

Living up to its name, Innovator has continued to develop a host of new ETFs to introduce to market. BOUT is the company's ninth ETF and one of Innovator's "traditional" ETFs. In addition to this lineup, the firm has also launched a defined outcome family of funds. BOUT has an expense ratio of 0.80%, translating to $0.80 per $100 that an investor allocates to the fund.

As an up-and-coming product in Innovator's lineup, BOUT is playing catch-up to some of the company's more established ETFs. Innovator's largest ETF is the Innovator IBD 50 ETF (FFTY), which sports about $534 million in total investor assets.

While it's impossible to predict with certainty how stocks will perform in the future, Innovator's BOUT managers are hopeful that this new ETF will pick winners. Looking forward, there may be some question as to how long BOUT will hold on to stocks that begin to break out – at a certain point, these names might better be placed in a momentum fund basket. On the other hand, so long as BOUT's picks are making money for investors, there would seem to be little cause for complaint. (For additional reading, check out: Top Five Smart Beta Momentum ETFs.)