As uncertainty grips the U.S. stock market, investors are increasingly turning to buffer exchange-traded funds (ETFs) to manage risk. These funds offer a compromise—limiting potential gains while providing a safety net against losses. Over the past month, amid a sharp market decline, buffer ETFs have attracted $2.5 billion in inflows, according to CFRA Research. So far this year, the sector has seen $4.7 billion in total inflows, coinciding with the S&P 500’s 6% decline.
On a particularly turbulent Monday, when the S&P 500 experienced its biggest drop of the year, buffer ETFs absorbed $140 million in net assets. “At some point, the stock market party had to stop,” said Dinon Hughes, a financial planner at Nvest Financial in New Hampshire. Anticipating volatile market conditions, Hughes started shifting his clients’ investments into buffer ETFs last year.
How Buffer ETFs Work
Offered by major asset managers like Innovator Capital Management, BlackRock, and Allianz Investment Management, buffer ETFs use options strategies to cap potential losses. In exchange, they limit the possible upside for investors, as the gains are used to finance the protective mechanism. The extent of these gains varies depending on market conditions, with higher volatility typically translating to lower upside potential.
Financial advisors have increasingly recommended buffer ETFs as a way to reassure clients about staying invested in stocks despite market turbulence. “A year ago, we were reaching out to them to introduce the concept,” said Graham Day, Innovator’s chief investment officer. “Now, they’re calling us to help them navigate uncertain markets.”
A recent Innovator survey found that 82% of advisors were more concerned about stock market risks than any other asset class.
Rising Market Volatility Spurs Demand
Investor concerns over economic stability have been exacerbated by trade tensions and political uncertainty. “When you have these jolts, it creates a new level of both uncertainty and urgency,” said Johan Gran, head ETF market strategist at Allianz. Recent spikes in volatility have driven total assets in buffer ETFs to $64 billion by the end of February, a sharp increase from $38 billion at the end of 2023.
According to Fuse Research Network, inflows into buffer ETFs are expected to nearly double this year. “This volatility is a reminder of the importance of defensive portfolio strategies,” said Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors. “You shouldn’t be reacting to market moves—you should be preparing for them.”
Advisors Weigh the Pros and Cons
Some financial advisors have already made substantial shifts in their clients’ portfolios. Stuart Chaussée, a California-based advisor, moved many of his pre-retirement and retired clients into buffer ETFs in 2022. “I was skeptical at first, but as long as the upside cap aligns with historical market returns, I’m open to it,” he said. Currently, $320 million of the $420 million he manages is allocated to buffer ETFs.
However, not all advisors are fully convinced. Nathan Garrison, chief investment officer at World Investment Advisors, is cautious about the trade-offs. “Having someone cover the first 15% of a selloff sounds great, but at what cost?” he said. In addition to limited upside, buffer ETFs often carry higher fees—typically around 0.7%, compared to as low as 0.05% for index ETFs or 0.35% for actively managed funds.
“You need to be mindful of market risks,” Garrison warned, “but also cautious about what you’re giving up in return.”