Buffer ETFs keep booming, and Wall Street is now betting investors want more options

CNBC

17-07-2025

Buffer ETFs are continuing to rake in cash from investors, and fund issuers have been rushing to create more variations to capitalize on the boom. The category had its biggest month of inflows ever in March and now has more than $70 billion in assets, according to data from ETF Action compiled by Strategas. Through June, the category was outpacing last year's flows and on track for another record year, even with a recent slowdown amid the stock market comeback. The basic version of a buffer fund looks like this: a fund gains exposure to a broad index, like the S & P 500 , using a combination of long-term options. The options are structured such that the fund loses nothing in certain downside scenarios, creating the "buffer," but in exchange gives up some upside in the event the market rallies. "For the most part, investors aren't necessarily looking to knock the lights out. They want to get a fair return and they want to protect their assets. They're concerned about the downside," ProShares CEO Michael Sapir. As the category has grown, the variety of funds has increased dramatically — both in timeline and risk profile. For example, Innovator launched funds last month that aim to generate positive returns during some market declines by effectively adding on a short position within the options strategy. A new ProShares suite of " dynamic " buffers reset every day, tapping into the zero-day options boom. Even Cathie Wood's Ark Invest has filed to launch buffer products built on the firm's notoriously volatile ETFs. Some of the ETFs are even pitched on more upside as opposed to downside protection. A series of FT Vest Accelerator funds trades some initial upside for amplified returns during big market rallies. "It's been well appreciated as the downside protection play, but there are other ways you can massage the distribution, if you may," said Karan Sood, CEO of Vest Financial, which is also the firm behind some of the most popular traditional buffer funds on the market. Performance and risks Buffer ETFs are an outgrowth of bespoke structured products and even mutual funds before them. The ETF category took off after 2022, which saw stocks and bonds fall in tandem and created an opening for a product that offered additional downside protection. Generally speaking, buffer ETFs seem to have performed well. A recent analysis by Morningstar's Jeffrey Ptak showed that buffer funds had generally succeeded over a five-year period ended in February. Still, there are risks. For one, the longer-term funds typically require an investor to buy on the launch or rebalance date and hold through the entire period to achieve the stated outcome. This is one reason for the variety of funds with different start dates, and can make comparing performance between ETFs tricky. The ProShares dynamic series is one potential solution here, though the funds are less than a month old and it remains to be seen if the daily rebalance strategy will satisfy investor demands for peace of mind. And even if a fund is delivering its stated returns, that might not be a smart move for every investor. Over multiyear periods, products with capped upside could underperform the broader market, even before accounting for the fees of buffer funds, which are typically higher than simple index products, often above 0.75% annually. These complicating factors make financial advisors the main audience for buffer products, and many of them are becoming "power users" and using multiple funds, Sood said. "A majority of the flow in our buffer ETFs is not coming from self-directed advisors but really from intermediaries — so financial advisors acting on behalf of their clients. They're the ones who are using buffer products," Sood said.