Times are tough for risk-averse equity investors. Accumulating assets for retirement and other time-sensitive goals typically requires sustained commitment to stocks. At the same time, equities can carry a level of risk that can be inappropriate for investors whose circumstances do not allow for major setbacks. Enter buffer ETFs.

Buffer ETFs offer a combination of equity-market exposure and downside protection. Assets invested in buffer ETFs have reached $84.2 billion since they were introduced in 2018, a period marked by uncertainty related to the global pandemic and subsequently resurgent inflation. Today, as geopolitical strife obscures visibility into the macro backdrop, the category’s growth is poised to continue.

Source: Morningstar Direct as of 9/30/2026. AUM based on the Defined Outcome Morningstar Category, excluding Fund of Funds.

Breaking Down Buffer ETFs

Buffer ETFs, also known as defined-outcome ETFs, are designed to help investors manage equity market volatility by establishing a defined range of potential outcomes over a set period.

Each fund offers a predetermined level of downside protection, called a "buffer," to cushion losses.. Investors do not participate in any losses until a market decline exceeds the buffer amount. In exchange for the downside protection, investors agree to cap their participation in market gains. The goal is to capture meaningful market upside while protecting against steep declines, helping investors stay invested to compound capital more effectively

These terms apply over a target outcome period. Traditionally, that period has been one year, but three-month outcome periods are gaining popularity among investors who want shorter timeframes. Whatever the length, the goal is the same: helping investors stay invested in stocks with a clearer view of the results they may experience.

Defining the Desired Outcome

There is a growing number of buffer ETFs in the marketplace, and it is important for investors to appreciate the differences among them. From there, identifying the right combination of potential upside and buffer level involves insight into an investor’s goals, risk tolerance, and market expectations.

The process begins with selecting the preferred index for equity exposure, whether it is the S&P 500 for the broader market or the Nasdaq-100 for more targeted growth potential, for example. Then, based on objectives and risk appetites, investors need to quantify their desired level of buffer protection and timeframe, or outcome period.

Two Paths to Outcome-Oriented Exposure

There are two main ways to invest in buffer ETFs. Investors can purchase individual buffer ETFs or laddered buffer ETFs.

Individual buffer ETFs are standalone funds tied to one specific target outcome period, typically one year. They use options on a reference asset, such as an index-tracking ETF, to set a defined range of potential returns. Caps on upside participation are locked in on the first day of the outcome period, at which point they are set for the remainder of the period.

As a result, individual buffer ETFs tend to appeal to investors with clear time horizons that match specific outcome periods who want a known cap and buffer from day one and can invest at or near the start of an outcome period.

A laddered buffer ETF is a fund-of-funds that invests in a set of individual buffer ETFs at the same buffer level, each with a different outcome period end date. Laddered buffer ETFs are simple to implement and model friendly, with one ticker fitting cleanly into model portfolios and rebalancing workflows.

Laddering spreads cap-timing risk across caps set at different points in the market cycle. No single launch date defines the result. Instead of betting on one moment, laddered buffer ETFs diversify across many, providing blended equity market participation over the holding period.

Read the full Q&A with PGIM Portfolio Manager Davang Gambhirwala for added insight into the emergence of buffer ETFs, their unique attributes, and how their ability to temper equity-related angst positions them as a key solution for risk-minded investors.