Exchange-traded funds (ETFs) that implement options strategies have seen a meteoric rise in popularity, with projections indicating that two of the most favored types could amass approximately $120 billion in assets by 2025. This trend has opened a window for investors to partake in advanced income-generating strategies that traditionally require profound knowledge of the financial markets, such as distinguishing between call and put options.
However, this surge in demand prompts critical questions regarding the effectiveness, cost-efficiency, and inherent risks associated with these financial instruments. Specifically, do these ETFs deliver on their promises? Are the elevated fees justifiable when weighed against their performance? These are among the pressing inquiries investors are grappling with as they consider these sophisticated options strategies.
The two primary categories of options-based ETFs capturing investor interest are Covered Call ETFs and Buffered ETFs, each employing distinct methods to generate income and manage risk. Covered Call ETFs function by owning a basket of stocks while concurrently selling call options against those holdings, which results in a stream of monthly income through the collection of option premiums. This income-generating mechanism, managed by professional investors, theoretically allows participants to reap benefits without delving deep into the complexities of options trading.
Buffered ETFs, in contrast, utilize tactical options contracts aimed at providing a degree of protection against initial losses—typically up to 10% to 15%—while still allowing for some upside potential. The premise of these funds is to afford a buffered range of outcomes; thus, they promise to shield investors from certain losses in exchange for capping returns at predefined levels.
In recent years, Covered Call ETFs have drawn a significant amount of capital, amassing approximately $75.2 billion in assets as of May 2025, with an average expense ratio of about 0.80%. Their primary appeal lies in their capacity to convert market volatility into income by leveraging investments in mainstream indices like the S&P 500 and the Nasdaq 100. By systematically executing covered call strategies, these ETFs are designed to capture both minor stock gains and option premiums, particularly thriving in sideways or moderately bullish market conditions.
Nonetheless, scrutiny of their performance over the past decade reveals a paradoxical outcome. Research from ProShares indicates that these funds often performed comparably to the broader market during downturns, capturing about 84% of the losses. When the market rallied, the fortunes of these funds did not fare much better, as they capitalized on only around 65% of the gains. Such statistics are concerning for investors seeking reliable downside protection. For instance, in a dramatic market shift from February to March 2020, the S&P 500 experienced a 32% drop, during which the Cboe S&P 500 BuyWrite Index—a representative of Covered Call strategies—declined nearly as much at 29%.
This analysis raises the question of whether the promised downside protection is somewhat illusory. By engaging in the sale of call options, these ETFs forfeit a substantial portion of potential upside gains. The income derived from option premiums often proves insufficient to provide true downside protection during rapid market declines, thus challenging the notion that these investment vehicles can reliably safeguard against significant losses.
On the other hand, Buffered ETFs have transitioned from a relative niche to a more substantial presence within the market. Following an explosive growth trajectory, these instruments ballooned from assets valued at $4.6 billion in August 2020 to approximately $43.4 billion by mid-2025, featuring an average expense ratio of 0.77%. Buffered ETFs are characterized by their specific “outcome periods,” generally spanning 12 months, during which they stipulate particular financial results. By shielding investors from the initial 10% to 15% of losses while restricting potential gains to a cap—such as 18%—these funds target a defined range of outcomes.
While Buffered ETFs have appeared to deliver on their promised outcomes in terms of downside protection, the return dynamics present a mixed picture. According to Morningstar analysts, these funds yielded an average return of 11% from 2020 to 2025, falling short of the S&P 500’s 14.5% gain over the same period. However, their capacity to mitigate downside exposure has remained effective; for example, during 2022, when the S&P 500 faced an 18% downturn, certain buffered ETFs recorded losses of only 7.7% or even just 4.0%, illustrating their protective mechanisms in turbulent market conditions.
Conversely, during bullish market scenarios, Buffered ETFs have generally experienced gains capped at about 75% of broader market advances. A case in point is the TrueShares Structured Outcome January ETF (JANZ), which posted an 18.1% gain in 2024, starkly contrasting with the S&P 500’s impressive 25% rise. Furthermore, research conducted by AQR Capital in 2025 posited that nearly 90% of defined outcome funds, including Buffered ETFs, produced lower returns than a straightforward investment strategy incorporating a combination of stocks and cash. This analysis has led experts to conclude that simply reducing equity exposure while maintaining a degree of cash investment might yield superior results without incurring the fees associated with professionally managed ETFs.
The narrative surrounding Covered Call and Buffered ETFs underscores their appeal as vehicles for accessing sophisticated options strategies without requiring intricate knowledge from individual investors. However, these seemingly attractive options come with substantial trade-offs. Covered Call ETFs may falter in fast-moving markets where sudden directional shifts can lead to losses, undermining their intended purpose. Buffered ETFs show promise in terms of downside mitigation but reveal limitations in potential upside participation and overall return compared to foundational investment strategies that do not impose management fees.
As the landscape continues to evolve, prospective investors should approach these funds with a discerning eye, weighing the complexities of their strategies against long-term financial goals. The higher fees associated with these products are another critical consideration, as they can significantly impact long-term portfolio growth and returns. In conclusion, while Covered Call and Buffered ETFs provide streamlined access to sophisticated financial strategies, making informed decisions remains imperative for the well-being of investment portfolios in a complex and dynamic market environment.