U.S. equity markets are riding high these days, with major indices hitting new record highs on expectations of interest rate cuts later this year. Still, ETF asset flows tell us that market participation with a focus on capital preservation remains a very popular pursuit. What’s more, product development keeps moving the needle on what’s possible when it comes to downside risk management. The ETF market welcomed this past month two first-of-a-kind buffer ETF approaches. Plus, it saw a new filing in the category none of us really saw coming.
$70 Billion in 7 Years
First things first, let’s talk demand.
In the first half of 2025, buffer ETFs or defined outcome ETFs — products that bubble wrap your equity exposure through options — attracted more than $8 billion in fresh net assets. The category will turn seven years old next month. It boasts more than $70 billion in assets today and more than a dozen product providers.
Innovator, the pioneer in this segment, is leading the asset gathering race this year. However, all of the asset managers offering their versions of buffer ETFs have picked up market share. Adoption is widespread, and it’s growing.
Why are investors buying these ETFs in greater numbers? Put simply, to manage downside risk, something that became a big concern in 2025 as markets navigated uncertainty.
As Innovator’s Andrew Nelson recently told me when asked about use cases for buffer ETFs and product choice, “It all comes down to individual risk tolerance and desired outcome.”
“If you have 30 or 40 years, you probably should be unhedged — the S&P 500 is a fantastic wealth creation vehicle,” he said. “We are not anti efficient-market-hypothesis. These buffer ETFs are not meant to provide outperformance.”
But, he said, if you’re approaching retirement in the next year or two, or are looking to the next five to 10 years, your appetite for risk is going to be very different. As he put it, “These ETFs are meant to provide certainty and downside protection.”
Today, the category consists of many flavors of buffers and defined ranges of upside and downside capture. Many reset their parameters annually, and some do it more often, such as quarterly. Now, following the latest launch from ProShares, outcome ranges can be redefined on a daily basis. Welcome to the era of daily resets.
ProShares Introduces Daily Resets
The ProShares Dynamic Buffer ETFs set out to make the business of defining a buffer range a daily affair. The firm, which is looking to patent the concept of “dynamic buffer,” argues that a daily reset allows investors to be more nimble and more tactical with their risk management efforts in markets that can move quickly.
The ProShares S&P 500 Dynamic Buffer ETF (FB ), ProShares Nasdaq-100 Dynamic Buffer ETF (QB ), and ProShares Russell 2000 Dynamic Buffer ETF (RB ) each adjust the upside capture and downside protection based on measures of expected volatility.
These index-based strategies look to three types of options contracts with one day to expiration — purchased puts, written puts, and written calls on equity indexes — to deliver a target downside protection between 1% and 5% in daily losses, and upside capture of up to 5%. The ETFs don’t actually transact in the options themselves, but track the underlying benchmark through swap agreements.
As the prospectus states, “Both the cap and the protection of the buffer adjust proportionally – the higher the expected volatility, the higher the cap and the larger the buffer.” According to ProShares, the S&P 500 sees, on average, three 5% drawdowns a year.
Innovator Debuts Dual Directional Buffer ETFs
Another recent innovation in Buffer ETF investing is Innovator’s Dual Directional Buffer ETFs, which launched this month. They are another first-of-a-kind for the category.
Like defined outcome strategies, the Dual Directional Buffer ETFs offer downside protection up to a certain level, and upside capture that’s capped. The innovation here is that these funds also give you the inverse performance of the benchmark up to a level before the buffer kicks in. They are the Innovator Equity Dual Directional 10 Buffer ETF – July (DDTL ) and the Innovator Equity Dual Directional 15 Buffer ETF – July (DDFL ).
Here’s how they work. For example, if the S&P 500 is up 15% on the year, and you own DDFL, you are going to capture about 8% of that upside performance. If the S&P 500 is down 15% that year, you are going to be up 15% instead, thanks to the inverse performance capture. And if the S&P 500 is down 20% that year, you are going to be down 5%, as the buffer kicks in below that 15% mark.
That inverse exposure component is a new feature in buffer ETF land. It comes at the cost of some upside capture potential. You give up a little more than in other buffer ETFs in order to have the possibility of inverse capture as well. You could say win-win is great, but it’s never free.
These ETFs, which reset annually, use FLEX options to achieve their desired outcome. According to Innovator, the data is very supportive of the concept. “Historic returns of the S&P show that an investor in a 15% Dual Directional Buffer strategy would experience positive returns in 95% of all markets, and an investor in a 10% Dual Directional Buffer strategy would similarly experience positive returns in 90% of all markets,” the firm says. We’ll be watching.
Buffer ARK ETFs Too? You Bet
Beyond ProShares and Innovator’s latest launches, we also welcomed this past month a filing for defined outcome ETFs from none other than ARK Invest.
The firm detailed in a prospectus plans for four quarterly-centered ARK Defined Innovation ETFs. They are the ARK Q1 Defined Innovation ETF (ARKI), the ARK Q2 Defined Innovation ETF (ARKJ), the ARK Q3 Defined Innovation ETF (ARKL) and the ARK Q4 Defined Innovation ETF (ARKM).
These funds are essentially putting some guardrails around ARK’s flagship fund, ARKK. According to the filing, investors in these ETFs would give up the first 5% in upside capture for some downside protection. The protection kicks in after 50% in losses.
As far as buffered investing goes, this participation range sounds a little steep. It puts investors on the hook for a 50% drawdown. But anyone who’s invested in disruptive growth knows that the ride isn’t for the weak hearted. Maybe the takeaway here is that, even bubble wrapped, this segment of the market still requires some high conviction in order to stomach the risk.
While a filing doesn’t guarantee a launch, ARK’s move is unexpected, given the firm’s high conviction bets on growth. But the effort is yet another testament to the viability of the buffer ETF category in providing risk management solutions across the equity asset class.
Due Diligence Getting Harder
As asset managers break new ground and bring structured products into ETF wrappers, there’s a lot of education needed to understand how these funds work. Advisors looking to implement buffer ETFs face higher due diligence hurdles as product development innovates, that’s for sure.
As a quick plug, we at TMX VettaFi, too, remain committed to that due diligence effort. We are diving in and learning about these products in real time. Additionally, we host a lot of conversations with the asset managers behind them. We invite you to join us for our many educational webcasts — see our calendar of upcoming ones here.
Innovation is always exciting, especially when it solves investor problems. This category of funds has come a long way since the first fund launched some seven years ago, and product innovation has been a constant. Its growing asset-gathering success tells us that they are, in fact, helping investors manage downside risk.
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