MW ETFs that protect against 'painful' stock-market drops are attracting worried investors

By Christine Idzelis

U.S. stocks are trading around record highs

The Dow booked a fresh record high on Tuesday, while the S&P 500 finished just shy of its all-time peak.

Investors seeking to manage risk in their portfolios are turning to exchange-traded funds that buffer against losses in the stock market, using options-based strategies that are growing in popularity.

"The broad appeal is that you can stay invested in equities while protecting your downside," said Aniket Ullal, head of ETF research and analytics at CFRA Research, in a phone interview. Investors generally seem to be favoring buffer strategies over low-volatility ETFs when looking for ways to be more defensive, he said.

New buffer ETFs keep coming. BlackRock is listing on Wednesday the first in a series of iShares Large Cap 10% Target Buffer ETFs that provide protection against S&P 500 losses, while Cathie Wood's ARK Investment Management is launching the ARK DIET Q4 Buffer ETF to limit downside participation to about 50% of any drop in shares of its flagship ARK Disruptive Innovation ETF ARKK within a defined period.

Buffer ETFs, which use options contracts to protect against losses, may appeal to investors who are already in the market and want to "de-risk," as well to those sitting in cash who are worried about jumping in at the wrong time with U.S. stocks trading around all-time highs, according to Jay Jacobs, BlackRock's U.S. head of equity ETFs.

They might use buffer ETFs to gain "a measure of confidence that if you got the timing wrong," and the market sells off, then it's not going to be as "painful," Jacobs said in a phone interview. Investors who are "nervous" about high valuations after benefiting from the S&P 500's strong run over the past decade may seek "to get a little more defensive" by reducing some exposure to the index and allocating to a buffer ETF, he added.

The iShares Large Cap 10% Target Buffer Sep ETF, which begins trading Wednesday under the ticker STEN, provides protection against the first 10% of a selloff in the S&P 500 over the 12-month period through September 2026, according to Jacobs.

The ETF tracks the iShares Core S&P 500 ETF IVV and also trades options on the fund to provide some downside protection, he said. The upside cap for the iShares Large Cap 10% Target Buffer Sep ETF is 17.13% net of fee, according to BlackRock.

The giant asset manager plans to roll out later this month three more similar buffer ETFs that mitigate the first 10% of losses of the S&P 500 over a 12-month period, each starting and ending at different dates.

"We're bringing them all out in October," said Jacobs.

The ETF industry is booming, bringing to the masses complex trading and investing strategies used by institutions but traditionally harder for individual investors to access.

See: Inside the great ETF boom of 2025: 'How do you navigate all this?'

The options-based strategies used by buffer ETFs are changing the way investors think about mitigating risk in portfolios, according to Jacobs. For example, investors traditionally have used a diversified mix of 60% stocks and 40% bonds as a way to reduce risk in a portfolio, he said.

Many investors might not feel comfortable trading options themselves, so ETFs can make such strategies "very accessible" for individual investors as well as financial advisors or institutions, according to Jacobs. "We've seen family offices express interest in these products," he said.

BlackRock launched its first buffer ETFs in 2023. Those first two ETFs, which sought to protect against quarterly losses, will now hold option contracts with staggered maturities that are rolling each month to provide investors more flexibility within each quarter.

The funds, which will keep their tickers and trade as the iShares Large Cap Moderate Quarterly Laddered ETF IVVM and the iShares Large Cap Deep Quarterly Laddered ETF IVVB, are designed for investors who may be buying and selling through the year, according to Jacobs. He said that investors who want a "really clear definition" of their protection over a 12-month period may prefer the iShares Large Cap 10% Target Buffer ETFs.

"If you think about 10 years ago," low-volatility ETFs were the most popular way for investors to stay invested in equities but "be a little defensive," according to Ullal. But "since buffer ETFs came out, low-volatility strategies haven't attracted as much interest," he said.

Buffer ETFs in the U.S. that focus on equities have attracted around $9.7 billion of inflows this year through Sept. 26, while low-volatility ETFs saw $2.5 billion of outflows over the same period, according to Ullal. He pointed to Innovator Capital Management as being among the early creators of buffer ETFs, saying that First Trust and Innovator are the largest issuers in the category.

Shares of the Invesco S&P 500 Low Volatility ETF SPLV have gained 5% this year through Tuesday, according to FactSet data. The S&P 500, a widely followed index of U.S. large-cap stocks, has rallied 13.7% so far in 2025.

Investors in buffer ETFs typically trade a certain amount of upside participation in equities for "explicit downside protection," said Ullal. "The way the options are structured is that the more upside participation that investors are willing to sacrifice, the more downside protection they can get," he said.

Because buffered ETFs are based on a defined period, investors considering them need to "pay attention to how much of the remaining cap is still left, and how much of the remaining buffer is still left," he cautioned.

While exchange-traded-funds are generally popular with investors partly due to their relatively low costs, a Morningstar report earlier this year said that buffer ETFs are typically more expensive.

The iShares Large Cap 10% Target Buffer Sep ETF has a 0.5% fee. The ARK DIET Q4 Buffer ETF (ARKT) has a total fee of 0.89%, according to data on ARK's website.

The U.S. stock market closed higher Tuesday, with the S&P 500 SPX, Dow Jones Industrial Average DJIA and Nasdaq Composite COMP all rising. The Dow ended at a fresh record peak, while the S&P 500 finished just 0.1% shy of its all-time high booked on Sept. 22.

-Christine Idzelis

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October 01, 2025 07:00 ET (11:00 GMT)

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