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Back in 2018, Innovator introduced the world to a product that has grown into one of the hottest current trends in the ETF marketplace - the buffer ETF.

Its premise was simple. Give investors the opportunity to capture market-like returns, but at the same time protect them against a degree of downside risk. While these products could certainly work for anyone looking to mitigate risk in their portfolios, they seemed especially appealing to those transitioning from the wealth-building stage of life into principal protection.

At the time of their launch, the multi-decade bond bull market had ended and many questioned if the traditional 60/40 portfolio worked anymore. Instead of positioning a large chunk of one’s portfolio into an asset class that was offering historically low yields and losing money on a total return basis, why not re-position it into something that uses options for downside protection instead of bonds?

Since then, the buffer ETF market has exploded. Today, there are nearly 300 different buffer ETFs available with more than $48 billion in assets.

Originally, Innovator started with just three levels of protection on the S&P 500.

• The “buffer” ETF, which protects against the first 9% of losses

• The “power buffer” ETF, which protects against the first 15% of losses

• The “ultra buffer” ETF, which protects against 30% of losses after a 5% downside allowance.

In the current market, there are now funds that protect against many levels of downside protection based on the S&P 500, small-caps, international stocks, bonds and individual sectors. If you want downside protection in your portfolio, there’s almost no conceivable way you can’t get it through buffer ETFs.

There was one market, however, that wasn’t tapped up until recently - 100% downside protection.

How Do Buffer ETFs Work?

Buffer ETFs don’t actually invest in stocks or other securities. They buy & sell call & put options in order to synthetically create their desired exposures.

Innovator provides the following example of how one of their power buffer ETFs with 15% downside protection would be structured.

If the ETF is based on the S&P 500, the fund would initially purchase an S&P 500 call option in order to replicate the performance of the index. From there, the combination purchased put and sold put options provide the 15% downside protection buffer based on the difference in the strike prices. The final step is to sell an S&P 500 call option at a price that would fund the cost of the overall option strategy.

You Need To Give Up Something In Order To Gain The Downside Protection

The downside protection of buffer ETFs, however, doesn’t come for free. You have to give something up in order to gain something. The “something” you’re giving up is upside potential.

The sold call option in the last step detailed above caps upside above the strike price much in the same way that covered call ETFs do. Think of it as shrinking the range of potential outcomes. When you buy the S&P 500, your personal return could be anywhere from a total 100% loss to an infinite gain. With a buffer ETF, you could experience anything from an 85% loss (in the case of the power buffer ETF) to an X% gain based on whatever the fund’s predetermined cap is.

Buffered ETFs allow you to capture a lot of the upside of the underlying index, but not all of it.

In the end, you’re trading upside gain potential in exchange for a level of downside protection.

It’s also worth noting that in order to experience the full level of downside protection, investors need to own the fund for the ENTIRE outcome period. More on that in just a moment.

The Emergence Of 100% Downside Buffer ETFs

Now that we’ve got the mechanics out of the way, let’s talk about the more important piece - how they fit in your portfolio.

The 100% downside protection buffer ETFs were clearly built with more defensive-oriented investors in mind. Retirees or near-retirees will likely find them attractive because it allows them to capture stock market upside without the risk of suffering from a major drawdown when they can least afford it. Risk averse investors might appreciate it because it replaces the theoretical risk protection of bonds with an actual concrete level of protection. And, of course, market timers, who think a bear market might be in front of us, could use buffer ETFs to shield themselves from a market correction, but still profit in case they’re wrong.

As I see it there are two primary considerations when looking at 100% downside protection buffer ETFs before you dive in.

The first is the upside cap. In general, the more protection you seek, the greater upside potential you’re sacrificing.

To give you a sense of what type of upside exists with these ETFs, we can look again at the Innovator ETFs with a one-year outcome period.

• Buffer ETF (BJUL) - buffer level: 9%; starting cap: 17.4%

• Power Buffer ETF (PJUL) - buffer level: 15%; starting cap: 13.7%

• Ultra Buffer ETF (UJUL) - buffer level: 30%; starting cap: 14.4%

A 17.4% one-year return limit on the S&P 500 is quite high, especially considering its average annual return over time is around 9%. The cap shrinks by a fair amount once you move from the 9% buffer to the 15% buffer. The cap actually goes up with the ultra buffer ETF because it allows for a 5% loss before the buffer kicks in. Either way, the buffer ETFs still give investors the opportunity to capture a significant amount of capital growth upside even with the buffers in place.

Before we move on, we need to discuss the “outcome period” of buffer ETFs.

This is the period of time covered by the underlying options contracts. In order to experience the full buffer and the full upside cap, you need to own the fund from day 1 all the way through day 365. If you invest anywhere in between, your return profile could be different and you could potentially experience losses.

That’s why it’s become so nice that there are buffer ETFs with outcome periods starting at every month of the year. If you miss one month’s start date, you only need to wait a few weeks and you can invest on day 1 of the next one!

The second one is the outcome period.

When the buffer ETFs first launched, they were virtually all one-year outcome periods. The first 100% downside buffer ETF to launch, the Innovator Equity Defined Protection ETF (TJUL), has a two-year outcome period. That means one would need to hold it for the full time frame in order to get the 100% protection (it has a cap of 16.6% total return).

A 16%+ return over a two-year time frame would be solid, historically speaking, as it falls roughly in line with the S&P 500’s 9% long-term average annual return. In recent years, that doesn’t sound quite as attractive when the large-cap indices are cranking out more than 20% per year, but remember that most of investors’ portfolio damage is done during bear markets. Not just because they’re losing money in a correction, but because of the tendency to panic trade and “sell low, buy high”. Buffer ETFs help eliminate some of those behavioral flaws.

But some investors don’t like the two-year outcome period. Innovator responded by launching 100% downside buffer ETFs with one-year and six-month outcome periods instead. The protection level is the same, but the caps are lower due to the shorter time frames. The two buffer ETFs launched earlier this month, the Innovator Equity Defined Protection ETF - 1-Year July Series (ZJUL) and the Innovator Equity Defined Protection ETF - 6-Month January/July Series (JAJL), has current caps of 9.5% and 5%, respectively.

Which Strategy Should You Consider?

I think the choice really comes down to the outcome period and how volatile you think the market will be.

The caps on these funds may be consistent with long-term average annual returns, but returns can be volatile in any given year. Just look at the annual returns of the S&P 500 over the past century.

You may miss out on some of the upside on a short-term basis, but long-term returns are achieved by mitigating downside risk, not maximizing upside potential. Avoiding those red bars is where the real money is made.

Full disclosure: I currently own shares of TJUL, so for me, I’ve decided the higher cap with the longer outcome period makes more sense. For those looking for flexibility and perhaps being interested in pivoting more frequently, the shorter outcome periods may make more sense.

Again, the 100% downside protection is the key benefit, so any will likely work well.

Current List Of 100% Downside Buffer ETFs

Innovator may have been the, well, innovator in this space, but many issuers have joined the party. First Trust, Allianz, PGIM, Pacer and TrueShares offer a large number of these funds, but iShares, Calamos and KraneShares are some of the other players.

The list of 100% downside protection buffer ETFs is evolving rapidly and may even be outdated by the time you read this, but here’s what we have thus far.

• Innovator Equity Defined Protection ETF - 2-year to July 2025 Series (TJUL)

• Innovator Equity Defined Protection ETF - 2-year to July 2026 Series (AJUL)

• Innovator Equity Defined Protection ETF - 2-year to January 2026 Series (AJAN)

• Innovator Equity Defined Protection ETF - 2-year to April 2026 Series (AAPR)

• Innovator Equity Defined Protection ETF - 1-year July Series (ZJUL)

• Innovator Equity Defined Protection ETF - 6-month January/July Series (JAJL)

• Calamos Nasdaq 100 Structured Alt Protection ETF - June Series (CPNJ)

• Calamos S&P 500 Structured Alt Protection ETF - July Series (CPSJ)

• Calamos Russell 2000 Structured Alt Protection ETF - July Series (CPRJ)

• FT Vest U.S. Equity Max Buffer ETF - March (MARM)

• FT Vest U.S. Equity Max Buffer ETF - June (JUNM)

• iShares Large Cap Max Buffer June ETF (MAXJ)

• KraneShares 100% KWEB Defined Outcome January 2026 ETF (KPRO)

Final Thoughts

I’m a big believer in defined outcome strategies and those offering 100% downside protection will find a large audience of interested investors.

Given the current market environment we’re in, some investors may not be keen about giving up capital growth potential in exchange for the downside buffer, but that is where the real money is made.

These funds will likely be a slow build until the market finally corrects and then they’ll finally be in high demand, even more so than they are now!

Until next time!

Dave