To say uncertainty reigns right now is a massive understatement. To say advisors are finding certainty with ETFs definitely isn’t — at least, when we talk about risk management in portfolios.
The Cboe Volatility Index, the VIX, is screaming uncertainty. The index measures 30-day expected stock market volatility through S&P 500 options. In other words, it points to expected near-future volatility in the stock market. The higher the VIX, the more uncertainty is expected.
In the past five days alone, the VIX went from around 30 to 60, and is now sitting around the low 50s (as of Thursday), far exceeding long-term averages. If a picture speaks louder than words, look at the VIX chart below.
Certainty Amid Uncertainty
In this environment, advisors have been looking for any level of certainty they can provide their clients. What they’ve been finding — asset flows show — is an answer in the defined outcome or structured outcome ETF space.
These ETFs are designed to deliver certainty, as in a predetermined outcome — a certain level of downside protection and a certain level of upside capture over a certain time period. They are the type of investment that tells you exactly what to expect.
“New tariffs announced are far worse than markets anticipated, and a lot of investors were caught flat-footed. With the S&P 500 still trading at 21x forward earnings and the Mag-7 still trading at 27x, we think repricing of growth risks have further to go,” according to Innovator’s recent market commentary. “Defined Outcome/Buffered ETF flows, which saw a record $5.6 billion of inflows in Q1, are unlikely losing steam given all the uncertainty investors are facing. Strategies are performing as designed.”
Performance according to design is the key here.
These options-based strategies not only deliver a stated range of market participation both to the upside and downside. They tend to do well amid higher volatility, which typically leads to higher option premiums.
“Everyone is trying to avoid volatility, but here, in covered-call strategies, you’re collecting the vol premium,” Calamos’ Matt Kaufman said. “Part of my options strategy is selling out-of-the-money calls, so when markets are volatile and I’m building this product, my upside capture rate goes up. We can give people good upside opportunities over the next year during markets like this.”
Tactical Risk Management
Implementation of these types of strategies is critical for the outcome. When you buy a 100% downside protection ETF, you will get zero losses over the outcome period, but not before or after. It’s key to hold the fund for the entirety of the period — a month, a quarter, a year — so that they deliver the expected result.
“If you think about how advisors go through a client’s risk tolerance, it’s a questionnaire. You check a bunch of boxes, and ultimately it spits out a conservative, moderate or aggressive score, and you know what works by looking back at a 20-year stock/bond correlation and fitting how much risk a client wants to that,” Kaufman said. “Today, the conversation can be, ‘You don’t want to lose more than 15%? Great.’ The advisor can give the client exactly the outcome they want with an ETF.”
Tactical Opportunities
That said, according to Kaufman, advisors have found tactical opportunities to capture some extra juice when using these ETFs tactically. That means getting into a certain fund when it’s already into its outcome period, e.g., buying into a February fund in April.
For example, consider a fund like CPSF, which offers 100% downside protection with a February defined outcome reset. Investors who bought into CPSF in February (on reset day) had an upside potential of 7.47% and zero downside risk over a one-year time frame, resetting in February 2026.
Since that strategy’s kick-off period, the S&P 500 has tallied losses in the double digits, and CPSF itself is currently down about 2% due to the time value in options. As with any of these structured outcome strategies, any losses “go back to zero” at the next reset, Kaufman explains. “You’re going to end right back where you started.”
However, the tactical opportunity for extra juice comes from some of these mid-outcome-period fund fluctuations.
“We’re actually seeing people buy in (February series) today because they’re saying, ‘OK, even if the market’s down, I’m going to make 200-220 basis points over the remainder of the period when it goes back to zero,” Kaufman said. “We are seeing more and more people buying-in opportunistically as well.”
Debunking Myths
Defined outcome ETFs are risk management tools that offer certainty in outcome and tactical opportunity in volatile times. But it’s key to understand how they work, and today, the lineup of funds includes a wide number of outcome periods and performance ranges, including laddered options strategies that offer perennial exposure. All from several different providers.
Implementation is easy, but due diligence requires a little bit of work.
Innovator ETFs recently published a helpful white paper titled “Common Misconceptions of Buffer ETFs” that highlights some of the myths about the category. For instance, it tackles the notion that a simple stock-plus-bond allocation can deliver the same risk profile as Defined Outcome ETFs.
“Implementing this approach in real-time requires accurate predictions of asset class performance, a feat that has proven nearly impossible,” the paper reads. “Even if an investor could perfectly allocate between stocks and bonds to match a buffer strategy’s risk profile, they would still face significant unknowns. Constantly adjusting allocations increases the likelihood of tactical errors that can undermine long-term portfolio growth.”
Issuers in this category — firms like Innovator, Calamos, Allianz, First Trust and others — each offer access to a lot of research and useful tools to understand outcome ranges and manage expectations. Calamos, for example, has this handy tool on its website:
As volatility spikes and advisors continue to look for ways to manage risk and find sources of returns in turbulent markets, these options-based ETFs have risen to the challenge and found a following that keeps growing.
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