David Bodamer
13 min read
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Markets are facing a fresh round of uncertainty with the United States striking Iranian targets over the weekend and Iran retaliating by firing missiles at a U.S. base in Qatar. Questions loom about the potential for spiking oil prices as observers wait to see if tensions escalate or simmer down.
It’s just the latest shock to markets this year. President Donald Trump’s “Liberation Day” tariffs and subsequent announcements have sent stocks and bonds whipsawing amid on-again, off-again developments. The Chicago Board Options Exchange's CBOE Volatility Index (VIX) currently sits at about 20 and at one point in April reached 50—the highest level since the height of the COVID-19 pandemic.
Easily and efficiently maximizing returns while mitigating risk is the promise driving one of the biggest recent success stories in exchange-traded funds: Defined outcome ETFs. By buying and selling options on the underlying portfolio, like a structured product, these ETFs promise to let investors realize market gains while still getting protection when they fall. The tradeoff: Sacrificing some portion of those gains should the market climb higher than the pre-determined limit.
The funds have grown from $5 billion in assets at the end of 2020 to $50 billion by 2025, according to Morningstar. In a recent report, BlackRock projected the space will reach $650 billion by 2030. Even institutional investors are buffing up their portfolios. In December, Bloomberg reported that the University of Connecticut’s endowment sold almost all of its hedge fund exposure in favor of the funds.
“What’s really resonating is the certainty in the downside protection,” said Graham Day, executive vice president and CIO, with Innovator, the firm that launched the first buffer ETF in 2018. “The ability of bonds to protect is now a huge question mark. And so that’s starting to stir the pot more in terms of what advisors are using to manage risk.”
Overall, more than 300 buffer ETFs are on the market. Two managers—Innovator and First Trust—still dominate the space, though others are competing by launching variations on the theme (i.e., Calamos has debuted Buffer crypto ETFs) or with lower fees (BlackRock’s funds cost slightly less than the average). Other managers jumping on the buffer ETF train include Goldman Sachs Asset Management, PGIM, Alliance Bernstein and Allianz.
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