Navigating Volatile Markets: How to Think About Buffer ETFs

by Amneet Singh of Russell Investments, 10/27/25

Key takeaways

  • Buffer ETFs partially shield investors from market selloffs but also limit upside gains, often underperforming the broader market.
  • Their effectiveness is greatest during moderate market swings—when losses are limited to 15% or less and gains stay below 10%.
  • A simple de-risking strategy may be a better alternative for investors who want to avoid big market drawdowns while still participating in market gains.

There’s FOMO—and then there’s fear of losing.

For many investors, the fear of missing out on market gains is usually second to the pain that comes from taking a loss in their portfolios. This is why many struggle to stay invested during rocky markets. Unfortunately, this tendency can lead to knee-jerk reactions like selling during a downturn—which means skipping out on the inevitable recovery.

Enter buffer exchange-traded funds (ETFs). They aim to keep people invested by protecting investors from a certain percentage of market losses—the first 15%, in many cases. But there’s a trade-off: market gains are limited—usually to 10% or less.

This structure allows buffer ETFs to provide more predictable returns over time. The result is a smoother investment experience that can help investors stay the course during turbulent markets.

But is the sacrifice in returns worth it? Or is there another way for investors to minimize their losses while still getting meaningful returns? What about simply selling some stocks and moving to cash?

We’ll dive in and take a look shortly. But first, let’s go under the hood and learn the mechanics of buffer ETFs.

Creating the cushion

Buffer ETFs use a combination of options, or financial contracts, to limit market gains and losses over a period of time—typically 12 months. This is done in three key steps.

Step 1: Get Market Exposure

Buffer ETFs need exposure to the broader market. Most get this by purchasing a high-value “call” option to mirror the returns of a broad index like the S&P 500. Some funds may instead use futures or buy the index ETF directly, though that’s less common.

Examples:

  • Buying a call option on SPY (the S&P 500 ETF) at a $600 strike price, covering 100 shares. This provides exposure similar to owning $60,000 of SPY.
  • Buying 100 shares of SPY at $600 each, creating a $60,000 portfolio.

Step 2: Add Protection

A “put” option is bought to limit losses if the market falls. Because this is expensive, additional trades are used to offset the cost.

Example: Buying a put option for $3,400, which covers 100 shares of SPY.

Step 3: Set the Buffer and Limit Gains

To cover the cost of the protective put, two options are sold.

  1. Lower-strike put: Protects against losses up to a certain level in a “buffer zone.” Losses that go beyond this zone aren’t protected.
  2. Call option: Limits how much can be earned if the market rises above a certain level.

Together, these two options reduce or eliminate the cost of protection while defining the ETF’s range of returns.

Buffer Blueprint

Example: A 15% downside protection means selling a put option at a price that is 15% below SPY’s current level of $600. In this case, that’s $510. At $14 per share, that earns $1,400 total.

If SPY falls below $510, the protected put bought earlier and the sold call offset one another, leaving just exposure to SPY.

To cover the remaining cost of $2,000, a call option is sold at $660—earning $20 per share, or $2,000 total. This caps any gains if SPY rises more than 10% above the initial level of $600.

Combining steps 2 and 3 results in a zero-cost buffer that shields the portfolio from the first 15% of losses. However, if SPY falls below $510, the buffer no longer provides protection. On the upside, the portfolio participates fully in the first 10% of gains. Beyond that, the gains are limited because of the sold call option overlay, capping returns beyond a 10% increase in SPY.

At the end of the one-year period in this example, the buffer ETF resets. It starts a new set of options contracts with the same percentage buffer level and term length—but with a new upside cap, depending on current market prices.