Buffer ETFs Have Paid Off, but Investors Should Know Their Limits

We recently published our annual Mind the Gap study in which we estimate the return of the average dollar invested in funds and compare that estimate to the funds’ reported total returns. The difference, or “gap,” represents the portion of the funds’ total returns that investors failed to capture due to inopportunely timed purchases or sales.

This year, we added a new section to the study in which we assessed the dollar-weighted returns of three newer types of exchange-traded funds that have been popular with investors—leveraged single-stock ETFs, crypto ETFs, and “buffer” ETFs. (For an overview of buffer ETFs, see this excellent roundup my colleagues published earlier this year.)

Maybe the most eye-opening finding—apart from crypto ETF investors’ poor results—was how successful investors in buffer ETFs were in capturing their total returns: Over the three-year period ended Dec. 31, 2025, their average dollar earned slightly more than the ETFs gained in aggregate, suggesting they deftly timed their transactions. Moreover, they out-earned the ETFs by an even larger extent over the five years ended Dec. 31, 2025.

Discipline and a Little Luck

What explains the extent of investors’ success? It appears to boil down to two factors. First, flows clustered around the month in which the outcome period began and ended. (Buffer ETFs target a return within a designated outcome period. As such, they’re designed to be bought at the start of the outcome period and held to the end of it.) This made the demand pattern more like buy-and-hold than other investment types where flows might be more irregular or episodic.

Second, investors appear to have benefited from fortuitous timing, especially in 2022. Stocks and bonds took a drubbing that year, but the losses were largely confined to the January-June period. This portended well for investors in the “July” buffer ETFs, for instance, who concentrated their purchases in that month and shortly thereafter, just as performance began to stabilize.

These findings are consistent with what I’d previously found when assessing buffer ETFs’ dollar-weighted returns over the five years ended Feb. 28, 2025.

Did Buffer ETFs Succeed?

It’s one thing to say investors in buffer ETFs succeeded in capturing their total returns. But it’s another to say the ETFs themselves worked as designed.

In a typical scenario, starting at the outset of the outcome period, a buffer ETF will aim to participate in the returns of a designated index up to a specified level (“cap”) while avoiding any negative returns up to a certain point (“buffer”), beyond which the ETF incurs losses dollar for dollar with the index.

To illustrate, here are the caps and buffers that applied to one of the largest buffer ETFs by assets, FT Vest U.S. Equity Buffer ETF FDEC—December, since December 2020. The reference benchmark for this ETF is the price-only version of the S&P 500 index, and so, for instance, if that index gained more than 12.25% during the outcome period, you’d expect the ETF’s return to top out at around 12.25% after fees. Conversely, if the index tumbled more than 9.15% during the period, then the ETF would avoid the first 9.15% of losses (net of fees) but incur anything beyond that.

How did this ETF do? Here’s the ETF’s actual net returns during each outcome period compared with what one would have expected given the index’s performance and the ETF’s terms over those periods. In summary, this ETF did almost exactly as you’d expect given the terms that applied to each outcome period.

All told, the ETF gained around 11% annually over the nearly five-year period spanning Dec. 21, 2020 (that is, start date of first outcome period) and Dec. 19, 2025 (that is, end date of last outcome period), which is basically identical to what one would have expected given the terms, if a few percentage points lower than the S&P price-only index’s returns. For reference, I’ve also shown the returns of the S&P 500 total return index (inclusive of dividend reinvestment) as well as the 60% US stocks/40% US bonds portfolio.

But that’s just one ETF of 88 buffer ETFs that started the five-year period. Was it representative? Time didn’t allow me to examine every buffer ETF, but I was able to take a crack at analyzing the other seven “December” buffer ETFs in a similar fashion, comparing their five-year annual returns with what was expected based on the terms that applied over each of the five individual outcome periods.

In short, the returns were more or less in line with what you’d expect. (The lone exception, a TrueShares Structured Outcome ETF, sells out-of-the-money put options on the S&P, using the proceeds to buy at-the-money call options on the index. Given that, there’s no cap to its potential upside, but in reality, it couldn’t keep up with the benchmark given option costs, explaining the shortfall above.)

Lastly, I did a quick sweep of the 10 largest non-December buffer ETFs by net assets as of Dec. 31, 2025. As you can see, these ETFs have different outcome months, so it wasn’t prudent to measure their performance over the December 2020 to December 2025 time frame I used for the “December” buffer ETFs. Instead, I ran the study over the longest possible measurement period using fully completed outcome years that began in 2020 or on Jan. 1, 2021, and ended no later than a date in 2025. In that way, there’d be five discrete outcome years to analyze for each ETF.

Once again, the ETFs performed in line with what you’d expect given the terms that applied at the relevant times. For instance, from Jan. 1, 2021, to Dec. 31, 2025, Innovator US Equity Power Buffer ETF January PJAN gained 9.00% after fees, which was nearly exactly what its terms—that is, caps that varied from 9.8% to 18.8% depending on the outcome year and a 15.0% buffer throughout, all before fees—would have led you to expect.

Caveats

Even if buffer ETFs worked as designed and investors used them successfully, they still involve real trade-offs that are worth keeping in mind.

Fees

Buffer ETFs aren’t cheap: The average expense ratio was recently around 0.71% and nearly 0.80% on an asset-weighted basis. That’s far more than the leading allocation funds charge. For instance, Vanguard Balanced Index VBINX levies a measly 0.18% expense ratio, and popular target-date funds cost even less. If you want the assurance of a defined outcome, you’ll have to pay up for it.

On the other hand, buffer ETFs have been quite tax-efficient thus far. Though in the typical case, 60% of their realized gains are taxed at long-term capital gains rates and the other 40% at short-term rates, they’ve kept distributions to a minimum by offsetting gains against realized losses and carryforwards.

Opportunity Cost

Even when buffer ETFs work as intended, they can entail hefty opportunity costs, that is, the portion of upside that’s foregone because of return caps. As of July 2026, the average buffer ETF imposed a 13% cap on returns during the outcome period.

That might seem like it still leaves plenty of room for upside until you consider that when stocks have risen over a 12-month period, it’s often exceeded the 10% to 15% return cap common to buffer ETFs. Indeed, since 1926, US large-cap stocks have risen around 18.3% over the average 12-month period on a price basis alone. Moreover, they’ve risen 15% or more in nearly two-thirds of all rolling periods in which stocks have gained ground. (I’ve shaded the portion of the distribution that exceeds the typical 10% to 15% return cap.)

To be sure, the return caps will fluctuate higher and lower. For instance, following a punishing 2022, the return caps at the 10 largest buffer ETFs roughly doubled.

But with stocks having risen in three of every four rolling 12-month periods since 1926, it’s unlikely that buffer ETF return caps will spike often in this fashion. (There were some additional factors that made 2022 potentially unique, as I further explain below.) Absent that, investors must contend with the prospect of sacrificing a portion of stocks’ upside on a not-infrequent basis.

They also have to be willing to live without dividends, as most of the common buffer ETFs tie their payoffs to price-only indexes. That hasn’t mattered recently because price-only indexes have exceeded the return caps anyway. But it can be a bitter pill to swallow at times when stocks gain but less than the return caps.

Early Days

It’s true buffer ETFs have acquitted themselves well in recent years: Over the five years ended Dec. 31, 2025, 59 of the 88 buffer ETFs in our study generated a higher return than the 60% US stocks/40% US bonds portfolio, the average excess return being 0.75% per year.

However, it’s also the case that these ETFs owe much of that outperformance to a banner 2022 campaign. To illustrate, here’s the percentage of buffer ETFs that beat the US 60/40 portfolio in each of the five years, as well as the average excess return in those years.

As already mentioned, these ETFs have worked as designed, delivering on the terms they laid out. Nonetheless, those terms involve trade-offs, one of which is the real possibility these ETFs will fail to keep up with cheaper, simpler, lower-cost alternatives like the US 60/40 portfolio over a number of periods.

It’s also worth keeping in mind the somewhat distinctive nature of 2022’s selloff. Not only did it wallop stocks and bonds, which doesn’t typically happen, but it came amid an aggressive interest rate hiking cycle.

This worked out quite virtuously for buffer ETFs because initially the downside protection kicked in to prevent deeper losses. As the ETFs reached the end of their outcome period, they were able to reset their caps. Since interest rates had by then risen substantially, and because return caps tend to be correlated with rates, the ETFs were able to raise their caps far higher. That was a boon the following year when markets rallied, and the ETFs saw heady returns in an absolute sense.

There’s nothing to say a similar series of events couldn’t reoccur. But it’s also worth weighing other scenarios, such as one in which stocks fall but bonds hold up better amid monetary easing and a flight to safety. In such a scenario, investors would still enjoy the partial downside protection the buffer affords, but so too would the bond sleeve of a traditional balanced portfolio. Moreover, with lower rates, return caps wouldn’t necessarily ratchet significantly higher as they did in 2022.

Alchemy?

Some have criticized buffer ETFs for resorting to financial engineering, where simpler, cheaper approaches would suffice. Quantitative manager AQR, for instance, has authored studies in which it’s asserted that buffer ETFs are no better than a stocks/cash mix calibrated to match the market sensitivity of the buffer ETF concerned. (Buffer ETF providers offered their own retort.)

Whether you find AQR’s argument convincing or not, the debate underscores a key point: Buffer ETFs’ appeal is rooted at least partly in behavioral factors. That is, some investors are unable or unwilling to live with the uncertainty associated with a traditional asset mix of stocks, bonds, and cash. It might not be rational, but because buffer ETFs help to dispel at least some of that uncertainty by delivering returns within a designated range, it works for them.

But, to AQR’s point, buffer ETFs aren’t going to be the best choice for investors with the time horizon and stomach to withstand occasional drawdowns. It’s likely those investors will pay far less in fees and earn a higher return than those in buffer ETFs over a market cycle.

Conclusion

Encouragingly, buffer ETFs appear to have worked as advertised, delivering on the terms that define the outcome range. What’s more, investors have utilized them in the intended way, capturing the ETFs’ full total returns and then some by adhering to the outcome periods and maybe thanks to a dollop of luck as well.

But for all their potentially useful attributes, buffer ETFs still involve trade-offs. For instance, because they can often entail foregoing a portion of the upside when the market rises, they aren’t well suited to younger investors with a long time horizon. Also, buffer ETFs cost significantly more than leading traditional balanced portfolios, which is something even the most eligible candidates, such as retirees, should keep in mind.

Switched On

Here are other things I’m reading and listening to:

• Active funds are getting a reprieve in 2026
• Morningstar’s semiliquid fund cost estimates
• How liquid is your nontraded private credit fund? Depends who you ask.
• “The Investors Whose SpaceX Shares Vanished Before They Could Cash In”
• Yeah, maybe the Fed ought to hike
• “Best advice for meetings? Try not to meet.”
• “My last 18 meals had been beef and ferments; the scent of the clams was intoxicating.”
• Radiohead “Just”

Don’t Be a Stranger

I love hearing from you. Have some feedback? An angle for an article? Email me at jeffrey.ptak@morningstar.com. If you’re so inclined, you can also follow me on Twitter/X at @syouth1, and I do some odds-and-ends writing on a Substack called Basis Pointing.