In This Article:
After a steep sell-off triggered by President Trump’s April 2 tariff announcement, U.S. equity markets have staged an impressive comeback. The S&P 500 has added $9 trillion in market value in just over a month, rising almost 20% from April lows. However, there are doubts about how much markets could rise further without concrete trade agreements, despite the recent 90-day tariff pause and the announced breakthroughs with China and the UK (read: S&P 500 Makes the Fastest Recovery Since 1982: 5 Best ETFs).
In this backdrop, investors should consider innovative investment vehicles that strike a balance between growth and protection. One such solution gaining traction is Defined Outcome ETFs. These ETFs are designed to provide investors with a level of downside protection while allowing them to participate in upside market returns, making them a compelling addition to a diversified portfolio. There are several defined outcome ETFs, each with specific outcome periods and buffer levels.
Here, we highlight some prominent ETFs that offer downside protection to the major indices. These are FT Vest Laddered Buffer ETF BUFR, Innovator Defined Wealth Shield ETF BALT, FT Vest Laddered Nasdaq Buffer ETF BUFQ, Innovator Laddered Allocation Power Buffer ETF BUFF and iShares Large Cap Deep Buffer ETF IVVB.
Risk Warnings!
Some Wall Street analysts are issuing warnings that the rally may be overextended, driven more by sentiment than fundamentals, particularly as tariff risks persist. Though a temporary 90-day pause on U.S.-China tariffs recently reduced the effective tariff rate from 25% to 14%, EY Chief Economist Gregory Daco warns that the effective U.S. tariff rate remains near its highest level since 1939.
Per JP Morgan, risks such as tariff uncertainty, softening economic data and fiscal headwinds challenge the sustainability of the recent equity rebound. The analyst warned that markets are showing an "extraordinary amount of complacency" after rebounding from their “Liberation Day” losses. JP Morgan flagged stagflation — a mix of slowing growth and resurgent inflation — as a persistent risk.
Investor sentiment was further dampened by a recent Moody’s downgrade of the U.S. credit rating. This has raised questions about the longevity of the current market rally and the potential for increased volatility in the coming months (read: Moody's Downgrades U.S. Rating: What's Next for S&P 500 ETFs?).
How Defined Outcome ETFs Work?
Defined Outcome ETFs, also known as buffer ETFs or structured outcome ETFs, use options-based strategies to create a predefined range of potential returns over a set investment period, typically one year. These ETFs aim to cap the maximum return an investor can achieve, buffer a specific percentage of losses, usually 10%, 15%, or 20%, and provide transparent outcomes at the start of the investment period.
This strategy enables investors to understand the risk/reward trade-off before committing capital, which is particularly valuable during periods of high market uncertainty (read: Buffer ETFs Attract Billions as Investors Seek Shelter from Market Turmoil).
Defined Outcome ETFs utilize option contracts such as buy protective puts (these limit losses if the index falls), sell covered calls or call spreads (these generate income but also cap potential gains), or sell puts below the buffer (to help finance the strategy) to structure their payoff profiles.