Sponsored
Problems with Buffered ETFs, Structured Notes & Market-linked Annuities 

by Kevin Kroskey, CFP®, MBA

Buffered ETFs have been getting a lot of attention lately, especially with how rocky the markets have been. If you’re someone who’s feeling anxious about your investments or just trying to understand what’s out there, you might have come across these so-called “defined-outcome” or buffered ETFs. They resemble structured notes or market-linked annuities and sound like a dream: protect you from losses and still let you make some money when the market goes up. But are they as good as they sound? 

Structure 

These structured products are marketed to be like guardrails for your investments. They’re designed to give you a cushion if the stock market drops. For example, one might protect you from the first 10% of losses. So, if the market falls 8%, you won’t lose anything. In exchange for this cushion, there’s a catch: your gains are capped. Maybe you can only earn up to 12% if the market soars. 

Structured products create these outcomes by using financial contracts called options or swaps. Generally, buffered ETFs are an improvement over the other two products for a multitude of reasons. Most notably, ETF benefits are relatively lower (but still fairly high) costs and easier access to your money. 

These ETFs often run on a 12-month cycle. If you buy after launch or if you sell early, you might miss out on protection and potential gains. And since they reset, you are forced to realize any gains yearly. If purchasing outside an IRA account, the tax drag on reset products can be a significant detractor to your wealth accumulation over time. 

Timing Risks 

When markets take a hit, structured products may soften the blow for investors. But what if the downturn was deeper than the buffer? If you had a 10% buffer and the market dropped 18%, you still lost 8%. 

Now here’s where it gets tricky. If your product resets after a loss, a new cycle starts, but it does so at a lower starting point. Now your upside is capped relative to this lower entry point. If history teaches us anything, it’s that rebounds often follow downturns. But here, if the market recovers by 25% next year, your gains would be limited to the cap while the rest of the market enjoys the full ride back up. 

To make matters worse, volatility tends to spike in times of market distress. The higher the volatility, the more expensive the protection costs. Thus, for the successive period, the lower the cap and buffer will be. 

Stocks and Bonds 

While structured products add timing and other risks, there are scenarios where they can add value. So, how do we conclude if they’re likely to be a net positive or negative addition to your portfolio? 

Anytime you consider adding complexity to your portfolio, a good starting point is to compare the fancier strategy to a simpler, time-tested one. For example, why not invest in a mix of inexpensive stock index funds and cash? 

Investment manager Applied Quantitative Research (AQR) recently investigated how these strategies perform compared to a simpler 70% stock index and 30% cash portfolio. They examined all 99 funds in Morningstar’s options trading-related categories with histories dating back to January 2020 through January 2025. AQR found that two-thirds of the funds delivered lower returns compared to the simpler portfolio. And despite the promised protection, 81% of the buffered products had greater drawdowns. 

Lower returns and greater drawdowns? No, thank you. 

This 5+ year period isn’t that long to arrive at weighty evidence. Yet, theoretical underpinnings and similar studies over prior periods arrive at similar conclusions. Adding timing risks, higher costs, and more complexity inherent in option-based strategies such as buffered ETFs, structured notes, or market-linked annuity contracts isn’t a sound evidence-based portfolio move.

Final Thoughts 

Structured products can offer some peace of mind. But if you or your advisor are starting at what feels good rather than what the theory, evidence, and math show, you’re getting off on the wrong investment foot. Capping your upside, paying higher fees, losing returns to taxes, and adding complex timing risks inherent in these strategies should be expected to leave you financially worse off over time. 

If you are concerned about your level of risk, trying to seek higher risk-adjusted returns, or are simply trying to make the most of what you have, there are improvements to consider beyond the simple portfolio. Instead of defining your outcome, increase your portfolio diversification. Buffered ETFs have the same underlying source of return as the stock market because they are linked to the stock market. Assets or strategies with both unique and positive sources of expected returns can better diversify and improve your portfolio’s resiliency. 

If you have these products in your portfolio, it doesn’t mean you should make a knee-jerk reaction to sell. Again, start with math and plan a smart exit. If unsure how to proceed, seek a second, well-informed, math-first-feelings-second opinion. 

Sponsored by

Kevin Kroskey, CFP^®, MBA is the Founder of True Wealth Design, providing “Accounting, Tax & Wealth Solutions To Help You Plan Smarter and Live Better.” This article is for educational purposes only. The strategies referenced apply to Accredited Investors or Qualified Purchases per SEC regulations. To explore how these strategies may apply to you, call or email kkroskey@truewealthdesign.com.

Opinions and claims expressed above are those of the author and do not necessarily reflect those of ScripType Publishing.