Investors looking to shield themselves from market downturns have increasingly turned to buffered exchange-traded funds (ETFs), and this trend is likely to persist. These funds, also called fixed outcome ETFs, utilize options to offer a safety net against losses, but there’s a price for that protection. As reported by Morningstar, the average annual fee was 75 basis points in 2025. Yet, Cerulli Associates projected in November that the ETF market could expand at a compound annual growth rate of 29% to 35% over the next five years. In a rosy scenario, this growth might see assets soar to over $334 billion by 2030. According to Zachary Evens, a passive strategy analyst at Morningstar, the 420 defined income ETFs together held $78 billion in assets by the end of 2025; this is a significant jump from just $2 billion in 2020. “Advisors with risk-averse clients find these products appealing because they provide clear outcomes,” he noted. “The variety of options allows us to tailor a customer’s risk profile quite precisely.”
The outcomes for these funds are predetermined and apply only at the end of their respective periods. Take, for example, a January Series ETF that spans from January 1 to December 31 each year. These ETFs employ options to mitigate potential losses from the underlying index—often the S&P 500. The specifics of loss prevention vary; one ETF might cushion the first 10% of losses while placing a cap on gains at a certain limit, like 15%. For instance, the iShares Large Cap 10% Target Buffer December ETF has a cap set at 16.15% and a net expense ratio of 0.50%. Daniel Loewy from AllianceBernstein commented on current trends, indicating that, given potential market volatility, these ETFs could be valuable additions to investors’ portfolios.
It’s been a challenging start to the year for stocks, although values remain near their highs. Curtis Condon, president of XML Financial Group, remarked that Buffer ETF investors might not stress as much about missing out on big gains during market peaks. “While we maintain a long-term perspective, we can’t discount that the market is currently operating at elevated multiples,” he said. “Historically, high multiples suggest modest future returns.”
Condon uses Buffer ETFs for clients who already have investments in bonds but prefer less risk than a purely stock-based portfolio; they are also not particularly interested in traditional bonds or cash. He pointed out that since these ETFs do not provide dividends, clients typically have enough savings for their lifetimes and don’t require additional income. “They want to ensure their investments keep pace with inflation and earn more than bonds without significant downside risks,” Condon explained. “They are a different source of income compared to merely holding stocks and bonds.”
Stuart Chausse, a senior wealth advisor at Lido Advisors, believes buffer funds are particularly suitable for clients approaching or in retirement, as he invests about 75% of his operational funds in these products. “This approach makes life easier for our clients,” he shared. For instance, buffer ETFs that replicate the S&P 500 typically offer 10% to 15% protection against initial losses, and this protection resets annually. Chausse mentioned that bonds aren’t as appealing given their lower current yields, which often fall below 4% when accounting for inflation and taxes. “Given the situation, I’d prefer to hold a buffer ETF for my clients,” he remarked. However, he cautioned that more downside protection typically correlates with a lower cap on returns. For example, the iShares Large Cap Max Buffer December ETF ensures up to 100% protection but caps gains at 6.3%.
Chausse noted that a full 100% buffer might be excessive, suggesting a thoughtful approach for younger investors. Advisors usually hesitate to recommend these products to younger demographics as they can limit returns in strong market years—returns that exceeded 16% in 2025 and approached 23% in 2024. “With restricted upside and potentially high costs, this may not be the optimal way to achieve a balanced risk profile,” Evens from Morningstar said, implying that a more conventional bond-to-equity allocation could benefit investors more, particularly with undervalued index ETFs.
