Buffer ETFs gaining popularity for downside protection, despite higher fees

From Yahoo Finance: 2025-06-24 10:48:00

Buffer ETFs are gaining popularity among asset managers, offering protection against losses while capping upside gains. These products have fixed time spans, usually a year, and come with higher fees compared to traditional ETFs. Despite some skepticism, inflows into buffer ETFs have steadily increased, reaching $5.6 billion year-to-date.

Providers offer a range of buffers, allowing advisors to choose their risk tolerance levels. These ETFs can easily fit into most trading platforms and performance reporting tools. Some investors use buffer ETFs as tactical investments, opportunistically moving in and out of funds to lock in gains or reset protection levels. Some providers now offer laddered products to provide time-based diversification.

While some critics argue that buffer ETFs underperform passive funds, supporters emphasize their role in providing downside protection. Asset managers are increasingly drawn to these products, despite higher fees. Inflows into buffer ETFs have been steadily increasing, with $5.6 billion flowing into the category year-to-date. These products are seen as a strategic allocation in portfolios for the long term. Buffer ETFs have proven successful, outperforming total returns. Despite risks of missing substantial gains, advisors like Phillip Knight of Americana Partners and Gary Quinzel of Wealth Enhancement recommend them as a complement to traditional portfolios, allocating 10-25%. Mike Loukas of TrueMark Investments sees benefits in uncapped funds for different investor needs. Advisors using buffer ETFs allocate 10-25% of client assets, more common in the RIA space due to broker/dealer restrictions on investments. Advisors recommend buffer ETFs to protect against panic selling during market downturns, appealing to investors’ aversion to losses. Studies show investors often miss out on gains due to selling during market volatility. Clients wary of market turbulence find the pricing on buffer ETFs attractive in uncertain times.

Read more: Higher Market Volatility Shines a Light on Buffer ETFs