What’s Ahead

Buffered ETF Basics

Traditional ETFs have become an important part of most investment portfolios, totaling more than $4 trillion in assets under management in the U.S. The convenience and transparency of the ETF vehicle has made it appealing to investors for all portfolio sizes. Daily liquidity, tax efficiency, lower fees, small investment minimums, and transparency make it highly utilized.

Buffered ETFs have recently entered the fray. These ETFs track an index over a defined period of time while offering a degree of downside protection, known as a “buffer.” Investors can also participate in the positive returns of the index to a predefined level, the “cap.”

Sometimes referred to as structured ETFs, defined outcome ETFs, target outcome ETFs or buffered outcome ETFs – there are a handful of names used in the marketplace depending on the issuing firm. We’ll refer to this type of ETF throughout the article as Buffered ETFs for consistency.

Common traits:

• Track the price returns of a specific index
• Seek to provide a level of downside protection
• Participate in upside returns up to a stated cap
• Have a maturity date at a specific point in the future, normally 12 months

Market Volatility & Demand

Market volatility is driving demand for outcome-based ETFs. Buffered ETFs can offer the best of both worlds: market participation with downside risk mitigation. Timing matters—these strategies can have many portfolio applications, but careful consideration for an entry point is needed.

Buffered ETFs help investors stay invested through choppy markets, reducing the likelihood of panic selling, and supporting long-term planning—particularly relevant for retirement planning.

How Are Buffered ETFs Created?

Buffered ETFs are typically created with FLEX Options, which allow customized strikes, underlyings, and expirations. They’re listed on the Cboe and cleared by the Options Clearing Corporation (OCC), a systemically important market utility. A buffered ETF’s ability to meet its objective depends on the OCC meeting its obligations.

Creating a Payoff Profile

Common buffers are 10% or 20% of reference index declines. The upside cap is set at the start date based on options market conditions. After launch, remaining cap and buffer vary intra-period as the ETF price and index move. FLEX options target price returns (no dividends).

When You Purchase Matters

• Start-date buyers (hold full period): stated cap and buffer apply.
• Intra-period buyers: remaining cap/buffer at purchase apply.
• Sellers before outcome date: cap/buffer do not apply; market value governs.

Track these three variables at purchase: remaining cap, remaining buffer, and remaining loss to buffer.

Portfolio Applications

1. Help Reduce Volatility — De-Risk Equity: Buffer downside while keeping some upside.
2. Diversify Traditional Allocation: Shift part of a balanced mix to defined outcomes with caps.
3. Put Cash to Work: Increase market exposure with a level of protection.

Context & Market History

Since 1957, the S&P 500 has had positive calendar-year returns 45 times and negative 18 times; full-year negatives occurred 29% of the time, including nine years worse than −10% and three worse than −20%. Larger losses require disproportionately larger gains to break even. A buffer on the first 10% or 20% can reduce the recovery hurdle.

Rolls, Resets, and Holding Periods

Buffered ETFs typically run for ~12 months and then reset—rolling into a new options basket with the same buffer and term but a new cap, depending on then-current market conditions. Tickers persist, allowing indefinite holding across outcome periods.

Key Takeaways

• Defined upside participation (to a cap) and downside buffer (to a level) over a stated period.
• Entry timing affects the remaining cap/buffer you receive.
• Useful for pre-retirees/retirees seeking risk-managed equity exposure.
• Price return exposure only; dividends on the index are not captured.

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Educational only — not investment advice. Buffered ETFs involve risks, including the potential for losses beyond the buffer, cap-limited upside, option counterparty dependence via the OCC, and path/entry-timing considerations. Review each fund’s prospectus and outcome period disclosures before investing.