Can Buffered ETFs Reshape Portfolio Management?

Financial advisors love the nuance. Investors love the guardrails.

With an estimated 11,000 Americans entering retirement every day, financial advisors are leaning hard into the fast-evolving buffered ETF category to offer a more predictable investment ride for seniors and cautious investors.

Introduced seven years ago when issuers employed options strategies to limit downside losses in exchange for caps on upside returns, the overall buffered ETF space has grown to $70 billion and includes more than a dozen ETF issuers, according to TMX VettaFi.

Buffered ETFs, which are also called defined-outcome strategies because they have preset issue and maturity dates, have emerged as one of the most innovative areas of the ETF space. The innovation, which includes a wide range of downside protection and upside performance parameters, is part of the reason the category took in more than $8 billion during the first half of 2025. But the rapid evolution is also the reason financial advisors need to stay nimble while allocating client assets into these strategies.

We Can Buff That Out

In the most basic terms, a buffered ETF will track a broad market index like the S&P 500 and limit the downside loss to a certain percentage while capping the upside return at a certain percentage. But the key is that these ETFs are typically issued monthly and have maturity dates that can range from a few months to a year. In order to receive the full benefit of the guardrails, investors need to hold the ETF for the full duration. And nuances beyond that basic example abound because issuers are constantly innovating. 

For some ETFs, the downside limit includes protecting the investor from the first 10%, leaving exposure beyond that point. With that structure, if the underlying index was down 15% over the full period, the investor would only suffer a 5% loss.

Up, Up and Away. Creativity is also prevalent on the upside caps, which are set based on multiple factors, including market volatility, interest rates and the cost of the options being used. For example, the TrueShares Structured Outcome July ETF (JULZ) does not place limits on the upside return of the underlying S&P 500 during the period, but due to the cost of the options the fund uses, it only pays about 87% of the index return to investors whether the return is low, high or somewhere in the middle.

Another example of where this category is heading comes from Innovator ETFs, which offers a kind of hedged downside protection that will pay investors if the underlying index declines. The Innovator Equity Dual Directional 15 Buffer ETF (DDFL) will take almost 50% of the performance on the upside. But if the index is down 15% during the period, the investor will be up 15%, thanks to the inverse performance capture.

“The main reason these products are so popular is we’re seeing a move away from the traditional stock and bond portfolio,” said Matt Kaufman, global head of ETFs at Calamos Investments. “This is about advisors being able to deliver certainty to their clients,” he added. “The sky’s the limit in terms of innovation because there are infinite ways to carve up exposures to a broad underlying index.”

Can You Stop Correlating?

Brian Storey, head of Multi-Asset Strategies at Brinker Capital Investments, cites the highly correlated market performance of 2022 as an example of why buffered ETFs are gaining appeal among financial advisors and investors.

“Stocks and bonds both delivered negative returns, and that shook the faith of many investors that core bonds could effectively serve as the ballast in their portfolios,” he said. “This dovetailed with a period of significant innovation and product proliferation in the ETF industry.”

The increased correlation between traditional stock and bond allocations is what steered Clark Randall, director of financial planning at Creekmur Wealth Advisors, toward buffered ETFs. “We have been using buffered ETFs for quite a while in place of fixed income, which has become much higher correlated to equities over the past few years,” he said. “We have found that buffered ETFs are not as volatile as equities, and they outperform fixed income.”

Todd Rosenbluth, head of research at TMX VettaFi, is also seeing a pattern of advisors using buffered ETF strategies as replacements for core portfolio holdings. “These products are good for people who want equity exposure, but are nervous about the markets,” he said. While Rosenbluth gives ETF issuers credit for providing plenty of detail on their websites about the respective upside and downside limits, he advises: “These products work best when they are held for the entire period they are set for.”

Liquid Diet

In essence, even though buffered ETFs have preset maturities, they have daily liquidity, which is something that could trip up less sophisticated inventors.

“I love buffered ETFs, but there is a steep learning curve if you don’t buy and hold them, which I don’t,” said Paul Schatz, president of Heritage Capital.

“There are nuances in when to sell after the asset rises near the cap and falls near the buffer,” he added. “There are many ways to use these products, and some behave more like bond proxies.”

Brinker Capital’s Storey said the pace of evolution in the buffered ETF space requires increasing advisor due diligence. “One of the drawbacks is that, under the hood, these ETFs are still fairly complex structured products,” he said. “Without adequately understanding the risks, an investor could just read the headline and not fully appreciate the ways in which the ultimate outcome could deviate from the expectations.”

The best thing about buffered ETFs is the “non-reliance on diversification and the ability to calibrate in deterministic fashion to a desired risk tolerance,” said Ron Piccinini, head of investment research at Amplify. The tradeoff is more work for the advisor because buffered ETFs effectively create a more dynamic portfolio. “The main negative is that advisors have to manage distance-to-caps during the life of the investment,” Piccinini said. “If the underlying index rallies and is 1% below the cap, the investor has almost no upside left and is exposed to downside all the way down to the original risk protection level.”

Pay Up. Of course, all the sophisticated portfolio engineering required to create those more predictable outcomes doesn’t come cheap. Investors can expect to pay expense ratios in the range of 50 basis points or more, which is hefty when considering there are ETFs offering long-only exposure to the S&P 500 Index for just a few basis points.

“You are paying a premium for the ability to control your destiny and for confidence that you will not get hurt in the market,” said Rosenbluth of TMX VettaFi. If investors think that markets will rise over the next 12 months, these are not the products for you, he added. “But if you’re nervous, then it’s worth paying the price.”