Losses are part of investing. Even Warren Buffett has lost money on various stock trades and deals. No one can hit 100% all of the time. The S&P 500 does have down years. With that in mind, limiting losses and volatility is key to long-term success. Previously, that meant buying bonds to smooth out a portfolio. But with bonds now showing plenty of volatility as well, it’s time for some advanced thinking.
And active ETFs deliver on that front.
The rise of buffer ETFs could be a game-changer for portfolios, reducing losses and smoothing out our rides. For investors, these active ETFs could be a real win in how we construct our portfolios.
Volatility Is a Major Issue
The financial markets have always been a bumpy experience. Pull up any chart of the S&P 500 or Dow Jones Industrials and you’ll see several big craters- the Great Depression, Black Monday, the Credit Crisis, the Dotcom bust, etc. Even zooming in, you can see that over the course of a week, a month, or perhaps a day, you can see the bumpiness of the market.
And lately, investors have been reminded of that short-term volatility. From geopolitical issues and tariffs to uncertainty surrounding interest rates and inflation, the market has been anything but smooth.
The problem is, volatility can really hinder and hurt a portfolio and actually reduce long-term gains. For example, a 20% loss requires a 25% gain to break even. And a 50% loss necessitates a 100% gain just to get back to square one. Moreover, those investors without the luxury of time on their sides- pre-retirees and those in their golden years- can’t let long-term compounding work for them. Or worse, they are required to take out money from their portfolios to live on, only to lock in losses. This is called the sequence of withdrawal risks.
Historically, investors have diversified into other asset classes, such as bonds, to smooth out their returns. But again, the bond market has been anything but smooth in recent years, offering little to no cushion.
Innovation To The Rescue
But if nothing else, Wall Street can be thought of as an innovation machine. When a problem exists, it designs new solutions to fight the problem. And in the case of volatility, it has turned its attention to active ETFs and the idea of smoothing out that disparity of returns.
Buffer ETFs have entered the chat.
These ETFs are actively managed. However, instead of buying stocks or bonds, managers purchase various derivatives and option contracts to deliver their desired outcomes. Managers will buy options to track the performance of an underlying index like the S&P 500 or NASDAQ 100 and, simultaneously, sell the call options tied to the same index.
This creates an exciting “sandwich” for portfolios. For starters, it builds a price floor for the fund that kicks in when the market has a drawdown below this amount. At the same time, the options contracts create a cap on gains. Depending on how the manager chooses to provide this protection via the options, they can either really limit losses, but offer lower gains, or provide more upside with less downside protection. Nonetheless, the basic idea is that investors can limit or mitigate losses and achieve a planned outcome for gains. You can lose X% and gain X% in a year.
No matter what or how the buffer ETF is structured, these new active ETFs could be mana from heaven when it comes to our portfolios and their construction.
For example, they can help with growth potential while providing lower volatility to a portfolio. This allows investors to stay invested, which, according to Goldman Sachs, offers the best outcome. Goldman Sachs Asset Management (GSAM) analysis shows that just two to eight days often separate the worst day in a drawdown and the best day of the subsequent recovery. Investors looking to time the market, flee to cash, and try to get back in often miss out. Missing those days can result in a wide range of return outcomes. This chart from GSAM highlights the difference. 1
Source: GSAM
But using a buffer ETF in place of some fixed income exposure, investors stay locked in to the equity markets. They can actually have increased long-term returns, reducing longevity risks in their portfolios.
Secondly, the options used within a buffer ETF provide a source of non-correlated returns. Looking at bonds, stocks, and cash, options strategies can provide an added layer of diversification and negative correlation. With many investors looking towards the private markets to find alternatives to rising stock/bond correlations, buffer ETFs could be a very liquid and low-cost way to do just that.
Additionally, buffer ETFs could be a great cash substitute- especially with the potential decrease in interest rates. Cash has been king in recent years as high interest rates have made the asset class yield 4%. The added uncertainty has made this risk-free asset class very appealing. But with the Fed getting ready to cut rates, cash won’t be as good. Deploying that cash could be a risky proposition. Buffer ETF could make for an excellent place for investors to get substantial returns, but limit volatility risks.
Finally, buffer ETFs and their defined outcomes can be used in enhanced liability planning. Because they are often “timed” to specific dates, investors can use them to create a stream of returns for future spending. After all, you can gauge loss and return potential, buy a buffer ETF, and plan for future needs. This allows them to potentially provide a similar role to owning individual bonds in a portfolio.
Adding Some Buffer Power
With that buffer, ETFs can be seen as a real solution to many market risks and issues. All in all, these new active ETFs provide plenty of portfolio benefits for a wide range of investors. So, they make sense for your portfolio.
Now there are some caveats.
Every buffer suite is entirely different. Manager A may use a different strategy than Manager B. It is essential to look at what you are actually buying. Secondly, some buffer eTFS are structured as continuous, while others protect for a set time period or month. Then they reset. Again, understanding that difference is key. And finally, costs do matter. Expense ratios and fees are wildly different within the asset class. In this case, low cost doesn’t always mean the correct choice.
Buffer ETFs
These funds were selected based on their low-cost exposure to buffer strategies. This is not a complete list of available buffer funds. They are sorted by their YTD total returns, which range from 5.7% to 8.9%. They have expenses ranging from 0.50% to 1.05% and assets of $60M to $1.3B. These ETFs barely pay any dividend.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| BUFM | AB Moderate Buffer ETF | $212M | 8.9% | 0% | 0.69% | ETF | Yes |
| BUFP | PGIM Laddered S&P 500 Buffer 12 ETF | $60M | 8.8% | 0% | 0.5% | ETF | Yes |
| PJAN | Innovator U.S. Equity Power Buffer ETF - January | $1.3B | 7.2% | 0% | 0.79% | ETF | Yes |
| BUFD | FT Vest Laddered Deep Buffer ETF | $1.3B | 7.1% | 0% | 1.05% | ETF | Yes |
| MAXJ | iShares Large Cap Max Buffer Jun ETF | $170M | 6.9% | 0.6% | 0.53% | ETF | Yes |
| IVVB | iShares Large Cap Deep Buffer ETF | $269M | 5.7% | 0.8% | 0.53% | ETF | Yes |
All in all, buffer ETFs can provide plenty of portfolio benefits and use cases. For investors willing to do some digging and investigate these active ETFs for their portfolios, better outcomes could be had. Investigating the various funds is crucial for selecting the correct buffer to meet your needs.
Bottom Line
With volatility growing and uncertainty rising, reducing losses and that risk is paramount for portfolios. Buffer ETFs are designed to do just that. By using options, they can reduce losses and smooth out portfolios, making them an excellent tool for enhanced portfolio construction.
1 Goldman Sachs (June 2025). More Predictable Outcomes in Unpredictable Markets: The Investment Case for Buffer ETFs
