Why Buffer ETFs Persist in a Sea of Single-Stock Funds

It’s no secret that risk is in vogue right now — at least for issuers.

According to a recent Morningstar report, more than half of soon-to-be-launched funds with prospectuses filed before the end of June are single-stock products, which tend to be more volatile than, say, broad-market funds. But ETFs that hedge against risk are showing their staying power, both for investors and issuers — the category represents more than $77 billion in assets, per data from Morningstar Direct.

“[Leveraged funds] tend to appeal to buyers who have a view on the direction of the underlying asset, and they want to express that point of view,” said Zachary Evens, Morningstar senior analyst. Meanwhile, buffer ETFs, which are in Morningstar’s defined-outcome category, “tend to appeal to advisors or clients who are risk-averse, saving for a large cash outflow, whether it’s college education, a house down payment [or] imminent retirement.”

Buffer the Volatility Slayer

Flows into the defined-outcome category have been steady, which is still a departure from the rapid growth they experienced during the market downturn in 2022 and 2023. There are also differences in demand for buffer ETFs more broadly and derivative income funds more specifically, the latter of which tend to have more volatile inflows and outflows, Evens said. Still, demand for the buffer ETF category has been consistent, he added. “Over the last year, it has not seen one month of outflows,” Evens said. “Investors are looking for protection in one way or another, and defined-outcome products deliver that.”

Some buffer ETFs recently brought to market:

• VanEck’s US Equity Buffer ETF – October (OCT), which launched last week.
• The AllianzIM International Equity Buffer15 Uncapped Jul ETF (JULI), which began trading in July.

Buffed Up: Given the impact that 2022’s downturn had on demand for risk-mitigating products, are volatility and buffer flows inextricably linked? Not necessarily, said Charles Champagne, head of ETF strategy at Allianz Investment Management. There’s certainly interest during times of geopolitical or macroeconomic uncertainty — such as the beginning of the US’ conflict with Iran earlier this year, or the tariff turmoil of last year — but risk aversion is part of any strong portfolio, he added.

“We see more [buffer interest] when there are events happening,” Champagne said. “But generally, we also see pretty steady flow[s] even when markets are strong and tensions are low.”