Buffer ETFs have attracted a compelling pitch: participate in equity markets while limiting the downside. With US$89 billion now amassed across various implementations, the category has grown from a niche strategy into a mainstream conversation, with some practitioners positioning buffers as a potential replacement for equities outright. But in a new analysis published by Man Group, Senior Client Portfolio Manager Adi Mackic examines whether the defined-outcome promise holds up across time horizons1 and, critically, at what cost.
The answer is nuanced. And for advisors thinking about long-term capital growth alongside risk mitigation, it deserves careful attention.
Protection Has a Price Tag
Buffers work through options strategies that define a range of outcomes over a specific period. To finance downside protection, an out-of-the-money call option is sold, capping upside participation. Mackic's team uses the Cboe S&P 500 Buffer Protect Index Balanced Series to proxy the category, examining its behaviour across rolling three-, 12-, 36-, and 60-month horizons going back to December 2005.
The near-term case for buffers looks credible. Over rolling three-month periods, the downside benefit outweighed the upside cost. But beyond 12 months, that relationship reverses. As Mackic observes, "buffers have been a helpful tool to potentially mitigate equity drawdowns over the near-term periods. However, they lost efficacy over longer horizons, particularly as this data includes large crises such as the Global Financial Crisis, COVID, and 2022's inflationary episode where the protection barrier is breached and downside participation moves in lockstep."
That is an important admission embedded quietly in the data.
The Asymmetry Problem
There is a second layer to this that compounds the difficulty. Equity markets are not symmetric. Over rolling three-month periods, the S&P 500 has been up nearly 75% of the time. What that means in practice: buffers cost investors approximately 2.0% in missed upside three-quarters of the time, while delivering a downside benefit of only 2.7% the remaining quarter. The math begins to tilt against the strategy when the base rate of equity gains is factored in.
Mackic frames the cumulative toll plainly. The Buffer Index underperformed equities by 2% per annum, despite a meaningfully lower maximum drawdown (44% versus 56% for equities). "In the absence of timing a short-term equity market correction," Mackic notes, "buffers appear costly in comparison to the upside that is missed out, which is made worse by the effects of reduced compounding."
Reduced compounding. Two words that carry significant weight for advisors managing client outcomes across decades.
An Alternative Worth Examining
Mackic's analysis does not stop at diagnosing the problem. It offers a comparative construct: a portable alpha approach combining 100% S&P 500 exposure with 100% trend-following exposure, using the SG Trend Index as a proxy.
The contrast is striking. Unlike the Buffer Index, the portable alpha construct showed no inherent upside cost. Instead, it enhanced returns during rising markets across the majority of horizons by adding a second layer of return through the trend-following allocation. On the downside, the protection was less pronounced over shorter windows but more pronounced over longer ones, which Mackic argues is precisely where it matters most. "These are arguably the drawdowns which investors care most about," he notes, "rather than smaller market corrections, which have (recently) been followed by a swift recovery."
The cumulative numbers reflect this. The portable alpha construct outperformed equities by nearly 2% per annum while reducing the maximum drawdown from 56% to 49%. On a volatility-adjusted basis, it came in lower than both the Buffer Index and equities. The trade-off, as Mackic acknowledges, is the absence of a defined outcome. The strategy is susceptible to weaker short-term mitigation and results will vary depending on the underlying alpha component.
A Question of Investor Architecture
To be clear, Mackic is not declaring buffers broken. He is making a more precise argument: that the cost of the defined outcome is not always visible, it compounds over time, and advisors should interrogate whether that cost is actually being paid for something their clients need.
"Whether you can have the cake and eat it too," Mackic concludes, "is not necessarily a yes or no answer as it might all come down to risk appetite and the personal situation of an investor."
That framing matters. Defined-outcome strategies serve a purpose for clients who genuinely cannot tolerate uncertainty in any form. But for clients with longer time horizons and growth objectives, the compounding drag of capped upside and missed equity gains may be a steeper price than the headline protection implies.
Key Takeaways for Advisors and Investors
- Buffer ETFs deliver near-term protection but erode long-term returns. The downside benefit outweighed the upside cost only over horizons up to 12 months. Over longer periods, the cap on upside gains has historically been more damaging than the protection was valuable.
- Equity markets are up most of the time, which amplifies the cost of capped participation. With equities rising in roughly three out of four rolling three-month periods, buffers charge investors an upside cost far more frequently than they deliver a downside benefit.
- Compounding makes the cost grow. A 2% annual drag on portfolio returns, sustained over a decade or more, represents a material reduction in terminal wealth. That math is worth modeling explicitly for clients.
- Portable alpha offers a structurally different trade-off. Combining full equity beta with trend-following has historically provided stronger long-term downside mitigation without capping the upside, producing improved risk-adjusted returns compared to both buffers and equities alone.
- The right tool depends on the investor's actual risk architecture. Buffers are not categorically wrong. For clients with short time horizons, defined distribution needs, or genuine intolerance for any short-term loss, the certainty of a defined outcome has real value. For growth-oriented investors with longer horizons, portable alpha constructs merit serious evaluation.
Footnote:
1 Mackic, Adi. "Beyond Buffers: Can You Have Your Cake and Eat It Too?" Man Group Insights, 15 Sept. 2026, www.man.com/insights/beyond-buffers-can-you-have-your-cake-and-eat-it-too.
