Buffer ETFs are also sometimes referred to as Defined Outcome ETFs, Target Outcome ETFs, or Buffered ETFs, but they are all essentially the same investment vehicles. These ETFs track a stock market index over a defined outcome period while offering downside protection, known as a “buffer.”

Buffer ETFs are one of the fastest growing segments of the ETF marketplace. According to Morningstar Direct, assets have grown from $200 million in 2018 to over $35 billion in 2024, and there are now over 200 Buffer ETFs trading on U.S. markets. Their popularity has skyrocketed.

If your investor profile matches one or more of the descriptions below, you will likely find Buffer ETFs very appealing.

You are a conservative or moderate-risk investor.
You are not interested in speculating in the stock market. You are looking for stable growth with reduced volatility and decreased risk of loss. With a built-in buffer against losses, Buffer ETFs should appeal to you if you do not want full downside risk exposure in the stock market.

You are a defensive-minded investor.
You are a defensive-minded investor more concerned about not losing money than hitting a home run. You would rather have a predetermined level of downside protection, and give up some upside potential, than have full downside exposure with no protection against losses.

You are relying on your assets in retirement and cannot afford the negative effects of deep market drawdowns.
You are nearing retirement or already retired and you want to greatly reduce the likelihood of large negative returns in your portfolio. This is more important to you than potentially missing out on high returns.

Buffer ETFs don’t actually own stocks. They use options to track the performance of a major stock market index (e.g., S&P 500, Nasdaq-100, Russell 2000) to a cap, with built-in downside protection. Historically, defined outcome investments have only been available through certain banks and insurance companies. Now, you can invest in these strategies in a benefit-rich ETF wrapper.

Typically, the buffer protects against the first loss of 9%, 10%, 15%, or 20%, depending on the Buffer ETF series you own. You can customize your portfolio and choose your desired buffer level over the outcome period, which is typically 12 months. There are also Buffer ETFs that reset quarterly or semi-annually.

The appeal of Buffer ETFs is easy to understand. Investors love to participate in the upside of the stock market, but they don’t like risk. Buffer ETFs offer a potential solution by providing a defined level of downside protection while also allowing investors to participate in stock market gains, to a predetermined cap.

The primary reason to accept a cap in exchange for downside protection is that you can greatly reduce the likelihood of large negative returns, and this is arguably much more important than potentially missing out on high positive returns. There is a strong case to be made for accepting this trade-off with Buffer ETFs, especially if you are relying on your assets in retirement and cannot afford the negative effects of deep market drawdowns.