Buffered ETFs’ $10B Year

Buffered ETFs’ $10B Year

Investors poured money into the funds, which protected against steep losses.

Reviewed by: Heather Bell
Edited by: Heather Bell

Defined outcome—or buffered—exchange-traded funds moved into the mainstream last year, pulling in about $10 billion as investors warmed to the funds’ ability in a down year to protect them against steep losses. 

Assets for the majority of the issuers in the space roughly doubled 2022, with the flows driven largely by investors’ unease about the direction and risks of the U.S. stock market. The $10 billion figure was calculated using ETF.com data and excludes so-called ETFs of ETFs. 

Defined outcome ETFs generally invest in flexible exchange options with the goal of replicating the price performance of an ETF or index within certain parameters. For example, most funds of this type have a hard upside cap on performance while offering some downside protection.  

Although they can be tied to any index or ETF, the vast majority seek to replicate the performance of the SPDR S&P 500 ETF Trust (SPY) or its underlying benchmark, the S&P 500 Index.  

Other funds are looking to replicate the performance of ETFs tracking the Nasdaq-100, the Russell 2000 Index or the MSCI EAFE Index, and the buffers and caps they offer can vary greatly.  

For example, the Innovator-branded “Buffer” ETFs protect against the first 9% of losses in the reference ETF, while the “Power Buffer” series protects against the first 15% of losses. The “Ultra Buffer” allows for losses of up to 5%, but protects against losses between 5% and 35%.  

Meanwhile, the FT Cboe Vest lineup of buffer ETFs, which is the result of a partnership between Cboe Vest and First Trust, includes a regular “Buffer” series that protects against the first 10% of losses and a “Deep Buffer” series that allows for a 5% loss but protects against losses between 5% and 30%.  

The funds generally reset annually, with ETFs in each family having reset dates spaced at monthly or quarterly intervals. Most of the SPY-related defined outcome lineups offer a fund that resets annually during each month of the year.  

The space is marked by a wide variety in the funds and multiple issuers. While Innovator and FT Cboe Vest are the biggest players in the space with the most assets, firms like AllianzIM, Pacer and TrueMark Investments all also offer their own versions of defined outcome ETFs.  


The largest defined outcome ETF in the space is the $787.7 million Innovator U.S. Equity Power Buffer ETF – November (PNOV). It pulled in $562.4 million last year.  

More broadly, if you’re looking solely at the nearly 100 ETFs offering unleveraged exposure to the performance of SPY or the S&P 500 Price Index with upside caps and downside buffers that are not ETFs-of-ETFs, those funds pulled in roughly $8 billion in assets, with products from Innovator ETFs, the first firm to launch defined outcome ETFs, representing about $4.3 billion of that total. 

The Innovator lineup of SPY buffer ETFs alone has nearly $8 billion in assets, meaning their assets almost doubled in 2022 even as the U.S. market plunged. Similarly, the same types of funds in the FT Cboe Vest offering pulled in $3.2 billion during the year, and had total assets of $6 billion at the end of 2022.  

“I think the primary driver is just that, throughout the whole year, there was so much uncertainty,” Joe Becker, Innovator’s director of product marketing, said of the dramatic inflows. “We saw rates rising, which put upward pressure on our caps, making that upside a lot more attractive. And volatility [was also a factor]. If you looked at [the VIX in 2022 and] the number of days above the 20 level, there were only three other calendar years, dating back to 1990, that had more days above 20, than did 2022.” 


Consider that in 2022, SPY fell by nearly 20%, but the worst-performing defined outcome ETF tied to SPY or its index was down 14%. The best-performing ETF offering buffered exposure to the same was up about half a percent.  

A look at the PowerShares QQQ ETF (QQQ), which tracks the Nasdaq-100 Index, shows a decline of nearly 33% in 2022. However, the worst-performing buffered ETF tied to QQQ was down 22.3%, while the best-performing one was down just 12.1%. Innovator and FT Cboe Vest each include four ETFs that provide unleveraged exposure to QQQ. 

Clearly, buffered ETF strategies were a good way to protect assets in 2022, at a time when even bonds were down sharply.  

A Blooming Area 

Defined outcome strategies in ETF wrappers provide investors with low-cost and uncomplicated hedging abilities, a feature that is especially important in times of market volatility.  

“Essentially, a buffer ETF is a is a hedge. One of the biggest reasons advisors don't hedge actually is why they don't use options. There's always been compliance and scalability [issues],” said Jeff Chang, president of Cboe Vest, noting that buffer ETFs allow investors another way to manage risk beyond asset allocation, which has typically been personified by the traditional 60/40 equity/bond portfolio. 

Innovator’s Becker also notes that defined outcome strategies tied to SPY in the last year provided not only significant drawdown protection, they also exhibited less volatility than an investment in SPY and offered investors a smoother ride. He further added that some investors are using buffer ETFs as a complement to their bond exposure or even to replace some of their bond exposure. 

Both Chang and Becker said their respective firms would be continuing to launch permutations of the defined outcome strategy. Chang noted that his firm is focused on offering more levels of protection and different underlying assets, while continuing to work with partner First Trust to provide educational resources to the advisors they work with. Meanwhile, Becker indicated Innovator would be looking to bring more income-related choices into its lineup.  

The outlook for 2023 is decidedly shaky as inflation is still running high, recession remains a threat and there’s been no significant improvement in the geopolitical atmosphere. With the drivers of asset flows in 2022 still largely in place, the outlook for buffered ETFs this year, in contrast, remains bright.  


Contact Heather Bell at [email protected] 

Heather Bell is a former managing editor of etf.com. She has also held editorial positions at Dow Jones Indexes and Lehman Brothers. Bell is a graduate of Dartmouth college and resides in the Denver area with her two dogs.