What Are Defined Outcome ETFs?

• The ETFs usually have an outcome period of 12 months, and investors need to buy and hold the fund for that period to realize the benefits.
• While buffer ETFs do not eliminate losses, they offer greater certainty amid times of heightened macroeconomic uncertainty.
• Investors pay more in fees than they would pay for other, lower-cost allocation funds.

Goldman Sachs on Monday announced that it has agreed to buy Innovator Capital Management, an active exchange-traded fund (ETF) sponsor, for $2 billion.

Active ETFs are among the fastest-growing investment products in the world, and Innovator is a pioneer of defined outcome ETFs, a type of such fund. “The transaction will significantly expand Goldman Sachs Asset Management’s ETF lineup and future product roadmap, and enhance the firm’s offerings in one of the fastest-growing active ETF categories,” Goldman said.

What Are Defined Outcome ETFs?

According to equity research firm Bernstein, defined outcome ETFs, also known as “buffer ETFs,” own options on an underlying index; in turn, these options create a payoff structure depending on the index’s return over a given period. The ETFs usually have an outcome period of 12 months. Investors need to buy and hold the fund for that period to realize the benefits.

Essentially, the “buffer zone” provides investors with some protection against losses while capping returns above a specific limit. For example, a buffer ETF may cap losses at 10% during market downturns while limiting gains to 15% during a bull run.

Risk Vs Reward

While buffer ETFs do not entirely eliminate losses, they offer greater certainty amid times of heightened macroeconomic uncertainty. Earlier this year, investors rushed to add defined outcome ETFs to their portfolios following the Liberation Day tariffs unleashed by President Donald Trump.

The buffer ETFs logged net inflows of $5.7 billion in the first four months of the year, compared with just over $10 billion in 2024, according to Goldman Sachs and Morningstar data.

However, investors need to ensure they hold the funds for the specific outcome period to realize the benefits, as they might miss out if they sell before the end of the timeframe. In addition, investors pay about 0.77% of the value of their investment in fees and expenses, which is more than they would pay for other, lower-cost allocation funds, according to Morningstar.

Among Wall Street players, the buffer ETFs have found the backing of the likes of BlackRock and Goldman Sachs, but detractors such as AQR Capital Management have criticized them for lower returns than other passive investment funds.

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