Can Buffer ETFs Really Help Weather a Market Plunge?

Welcome to the buffer zone. 

The dramatic stock market dive, amid the announcement of historic tariffs last week, may test the recent popularity and performance of buffer ETFs, also known as defined-outcome funds. The products are designed to help investors weather short-term volatility and have exploded in popularity this year. They may be even more attractive to investors as the S&P 500 plunged nearly 6% on Friday, following earlier drops last week. How long the markets stay down, or if they keep dropping, remains a question. 

“I would remind investors that the stated buffer/cap on these ETFs apply on the end date of their outcome period, and their protection might not hold up during the outcome period,” said Lan Anh Tran, a manager research analyst for Morningstar. “Some 10% buffer ETFs, for instance, are in the red right now alongside the market.”

A Safe Haven?

Buffer ETFs use options to help the products limit losses. Those ETFs started becoming popular following the volatility during the Covid-19 era, and were seen as one way of giving market exposure to cautious investors. They now represent more than $50 billion in assets, or about a 10-fold increase from five years ago. Relatedly, covered-call ETFs, which write call options on shares and generate income from the premium, have also gained favor as a hedge against volatility. Those products, also known as derivative-income funds, now represent $108 billion in assets, according to Morningstar Direct data.

While buffer ETFs can reduce downside, much depends on the terms and when they’re purchased. For a 12-month-duration, 10% buffer ETF with a period from April 1, 2025, through March 31, 2026, “investors can expect a 10% buffer if the market is down in a year, but don’t be surprised if it moves with the market in between those dates,” Anh Tran said.

Regardless, the products have been selling this year at rates doubling that of last year, per Morningstar Direct data:

• Defined-outcome (buffer) ETFs raked in over $4 billion this year through March, up from $2 billion during that time in 2024.
• Derivative-income (covered-call) ETFs sold $16 billion, up from $7 billion.

“While these ETFs can be an option for investors struggling to stay invested, their results depend a lot on when you buy them,” Anh Tran said. A ladder buffer ETF can alleviate some of the path dependency/market timing element, she added.

Running for Cover. ETF buyers have also flocked to commodities products this year. Inflows into the category were at far higher levels in February and March than at any time last year, data from FactSet show, though still small relative to equity and fixed income. That category also may not provide much cover: The S&P GSCI, for example, was down 5% Friday, bringing its total decline to 6% year-to-date.