Investors are increasingly turning to buffer exchange-traded funds (ETFs) as a way to mitigate potential market losses, and the trend shows no signs of slowing down. Also referred to as defined-outcome ETFs, these financial products employ options contracts to create a cushion against declines in the market. While this diversification strategy carries costs—averaging around 75 basis points per year in 2025, according to Morningstar—interest continues to grow.
Research from Cerulli Associates suggests that defined-outcome ETFs could experience substantial growth, with projections estimating a compound annual growth rate of 29% to 35% over the next five years. A particularly optimistic scenario forecasts that total assets in these funds could exceed $334 billion by 2030, up from $78 billion across 420 defined-income ETFs at the close of 2025. This represents a remarkable increase from just $2 billion in assets recorded in 2020.
Zachary Evens, an analyst specializing in passive strategies at Morningstar, attributes this influx of capital to the clarity these products offer, particularly for financial advisors managing more risk-averse clients. “Investors have been drawn to the explicit outcomes that these products can provide,” Evens remarked. The outcomes are preset and apply at the end of designated periods, allowing for specific loss protection against major indices like the S&P 500.
For example, the iShares Large Cap 10% Target Buffer Dec ETF starts by mitigating the first 10% of losses but may cap returns beyond a certain threshold. Its initial cap is set at 16.15%, with an expense ratio of 0.50%. Experts believe that with the current market volatility and elevated valuations, buffer ETFs can serve as a useful tool in investors’ portfolios.
Financial planner Curtis Congdon noted that although the market is trading at high multiples, clients opting for buffer ETFs are not overly concerned about missing significant gains. This perspective allows for long-term strategies while recognizing the risks associated with elevated prices. Congdon employs these ETFs for clients seeking a less aggressive investment option compared to an all-equity portfolio, especially those disenchanted with traditional bonds or cash yields.
Stuart Chaussée, a senior wealth advisor at Lido Advisors, highlighted the suitability of buffer funds for individuals nearing retirement. With approximately 75% of his assets allocated to these products, he emphasizes their ability to provide a smoother investment journey amidst market fluctuations. He prefers buffer ETFs over traditional bonds, largely due to their higher return potential and reduced fixed-income risks.
It is crucial for potential investors to remember that greater downside protection often leads to capped upside returns. For instance, the iShares Large Cap Max Buffer Dec ETF offers complete downside protection but limits gains to a starting cap of 6.3%. Chaussée considers this level of protection “overkill” for most clients, advising them to invest at reset dates to take advantage of defined outcome parameters.
However, advisors tend to recommend caution with buffer ETFs for younger investors. While these products may provide stability, they often limit potential gains during bullish market years. Morningstar’s Evens cautioned that, for many younger, risk-tolerant investors, traditional diversified portfolios may offer better value and performance than the more expensive buffer ETFs.
As the demand for these financial products continues to grow, they have become a noteworthy option for investors seeking both growth and protection in an increasingly volatile market landscape.
