(Bloomberg) — Bonds keep failing at one of their key jobs — cushioning stock losses. Wall Street has noticed, and it’s pushing an alternative: an $80 billion category of equity funds designed to provide the downside protection Treasuries may no longer reliably deliver.
Defined-outcome exchange traded funds, or buffers, use options to cap stock losses in exchange for limiting gains, a trade-off that’s pulled in advisers and endowments. So far, they’ve performed as advertised since the Iran war started: The $8.6 billion FT Vest Laddered Buffer ETF, the largest of the funds, is down 1.4% in March, compared to a 2.7% slide in the S&P 500 Index. Ten-year Treasury yields have climbed around 30 basis points over that span.
The pitch boils down to the idea that bonds have recently had a mixed record in offsetting equity declines. One striking example of that dynamic came in 2022, when rising interest rates spurred lockstep selloffs in stocks and Treasuries, bruising investors who had counted on fixed income as a hedge.
Defined-outcome ETFs have hardly weathered a prolonged bear market and critics, including AQR Capital Management, have railed against the relatively new products. Still, the search for reliable hedges has fueled a rapid climb in the funds’ assets, which stood at just $200 million in 2017. That growth spurred Goldman Sachs to splash $2 billion last year on a deal for Innovator Capital Management, which pioneered the first buffer ETFs.
“Over the past 10, 15 years, when there’s a big challenge in the market or spike down in the market, bonds tend to go right down with it,” said Bruce Bond, chief executive officer at Innovator — which oversees $32 billion in defined-income funds — on Bloomberg Television’s ETF IQ. “The beauty of a buffer ETF is you can know your outcome. You can know: ‘I have 10% downside protection and I have this much upside.’”
The products have resonated with financial advisers as well as institutions, with the University of Connecticut’s endowment ditching hedge funds in favor of buffer ETFs as a way to mitigate risk. Their popularity could also see a boost from the weak performance of some other traditional havens since the war began: gold prices are down by nearly 3% this month, for instance, while the Japanese yen has also slipped.
At the same time, interest in bond ETFs has waned. While the funds are still pulling hundreds of billion of dollars per year, their share of total ETF assets has dipped to roughly 17% versus a pandemic-era peak of 23%. Issuers have apparently taken notice: of the more than 1,000 new ETFs that launched in 2025, just 13% were bond funds — the lowest share in more than 15 years, according to Bloomberg Intelligence.
Ashok Bhatia, co-chief investment officer for fixed income at Neuberger Berman, has been telling clients not to rely on Treasuries to hedge day-to-day market volatility. “There’s just a lot more variability about where real rates should settle as well as inflation expectations and actual inflation,” he said on Bloomberg TV’s The Close.
While buffers have been touted by industry giants such as BlackRock, the category has also drawn criticism from hedge funds, including AQR. The firm argued last year that the options-powered funds deliver lower returns — with more risk — than simpler alternatives.
At the same time, it’s unlikely that Treasuries have completely abandoned their haven role. US government bonds rallied in the summer of 2024, when stocks slumped on economic worries.
Nevertheless, the mercurial nature of fixed-income’s hedging properties strengthens the case for substituting defined-outcome funds in their stead, argues JD Gardner of Aptus Capital Advisors.
“That predictability is valuable when building a portfolio meant to let investors stay invested through volatility,” said Gardner, founder and co-chief investment officer of Aptus, which manages about $5.7 billion across its ETF lineup. Compared with bonds, “buffered ETFs, paired with equity exposure, offer a better path towards compounding wealth, in our opinion.”