Ballooning 'buffer' ETF market leads to more complex array of products

Reuters

6 days ago

NEW YORK, August 4 (Reuters) - Investors are piling into financial products that offer them the chance to forgo some potential gains in exchange for protection against a market selloff, with the number of exchange-traded funds offering variants on this concept doubling in number and size over the last two years.
So far this year, some 30 of these so-called buffer funds have made their debut in the U.S. as investors try to protect recent gains from the risk that soaring valuations and ongoing policy tumult will prompt a retreat.
That brings the total number to nearly 350, compared to 178 two years ago, according to data from Tidal Financial Group. Each launch provides a new twist on the concept as more asset managers battle to win a piece of a pie worth $70 billion today and one that BlackRock (BLK.N), opens new tab expects to hit $650 billion by the end of the decade.
But the rapid growth and growing complexity of the new ETFs are fueling anxiety among some analysts and market participants that the asset management universe may be hitting "peak buffer", a point at which products become too exotic and too focused on a narrow market segment to be useful tools for most investors. That, in turn, creates the prospect of investors putting money into costly or unsuitable products.
"There are only so many ways to skin the cat, so every new product becomes more niche," said Dave Nadig, an independent ETF industry consultant. "The likelihood of any new product being brought out now that an investor's portfolio really requires is pretty small."
That is not stopping issuers from trying, however. Today, investors can buy risk-protected bitcoin products, buffer their exposure to Chinese Internet stocks, and own next-generation "dual direction" buffer ETFs, designed not just to minimize losses but to give investors capped gains in both rising and falling markets.
Plain vanilla buffer ETFs offer investors a way to swap part of their upside for some kind of cushion against losses on a portfolio of stocks, most usually an index like the S&P 500 (.SPX), opens new tab. The structure dates back to the 1980s, when it underpinned structured notes that were then fast becoming part of high-net worth investor portfolios.
Those still represent the lion's share of the market, with pioneers First Trust and Innovator Capital Management accounting for about 86% of buffer ETF assets and about 75% of inflows into the space in the first seven months of 2025, according to data provided by issuers and verified by Reuters.
But a filing in early July by a surprise new entrant into the buffer field - ARK Investments, the technology asset management firm founded by Cathie Wood - has prompted further debate. ARK is seeking approval from U.S. regulators to launch a suite of new buffer ETFs tied to its flagship ARK Innovation ETF (ARKK.P), opens new tab.
If they pass regulators' scrutiny, these would be the first ETFs tied to an underlying actively managed fund rather than a broad market index and shield investors from the first 50% of any losses on ARK Innovation. In exchange, investors relinquish the first 6% of any gain.
"It's a strange combination, to have a buffer alongside the high-conviction ARK Innovation strategy," said Bryan Armour, ETF analyst at Morningstar. "It's coming from the firm that was a pioneer of risk-taking and stockpicking in the ETF space."
That strategy has produced uneven returns, with the ARKK ETF generating a 152.8% return in 2020 but a 67% loss in 2022. So far this year, the ETF is up 32.8%, compared to 6% for the S&P 500 index, but both it and ARK continue to lose assets.
ARK executives declined to comment on the details of the filing, citing SEC restrictions during the post-filing "quiet period."
ARK could launch the new buffer in early September, at which point it will test investor appetite for more novel structures.
"My eyebrows are pretty much raised," said Kevin Warman, a financial advisor with Investment Management Corp, in Mount Pleasant, South Carolina. "But I'm not surprised that more companies are jumping on the bandwagon."
Relative newcomers include Goldman Sachs Asset Management - its first buffer ETF began trading in January - and BlackRock, which rolled out its first offerings in mid-2023, more than four years after Innovator and First Trust launched their own offerings.
Asset managers insist that the market for buffers is nowhere close to saturated yet, even as analysts and some financial advisors are watching the flood of new offerings with wariness.
Still, Warman said he and his colleagues are struggling to keep up with the details of each new product that launches.
"We want to make sure whichever of these we buy delivers on a real need," he said.