Introduction

Buffer ETFs (‘buffers’), also known as defined-outcome ETFs, have seen significant growth over the years, with US$89 billion¹ now amassed across various implementations and, in doing so, have garnered a significant amount of momentum with some practitioners positioning them as a possible replacement for equities (and bonds…?). In short, buffers have generally been touted as providing investors with equity market participation but with less of the downside. They attempt to do so through the use of options strategies, aiming to provide a defined range of returns over a specific period which, in theory, could protect investors from a set percentage of equity losses. To finance the downside protection potential and limit possible losses, an out-of-the-money call option is sold, resulting in capped upside participation.

While there has been some debate on the validity of buffers versus just holding less equity exposure, the purpose of this note is not to simply rehash this debate. Equally, the intention is not to examine whether they should be viewed as an equity (or bond) replacement. Instead, we set out to examine their effectiveness and limitations and explore a possible alternative.

For the purposes of this analysis, buffers are proxied by the Cboe S&P 500 Buffer Protect Index Balanced Series (‘the Index’, ‘Buffer Index’), which seeks to protect against the first 10% of losses from holding the S&P 500, while providing participation up to a capped level. The alternative approach we included in our study refers to a portable alpha construct, which combines 100% S&P 500 exposure and 100% trend-following exposure. The construction and potential benefits of trend following are discussed in greater detail here. Equities are represented by the S&P 500 Index and trend-following is represented by the SG Trend Index.

Protection, but at what cost?

The mission statement of buffers is clear: seek to mitigate risk by targeting a level of downside, while still retaining some of the upside potential of equities. And it appears that they may have achieved exactly that, with one exception. To illustrate this, we calculate the average return of the Buffer Index across up and down periods for equities, over rolling three-, 12-, 36-, and 60-month horizons, since the inception of the Index in December 2005. We then show the downside benefit and the upside cost of the Index, by plotting the difference in returns between the Index and equities over each time horizon in Figure 1. Simply put, the aqua blue bars show the value of protection defined as downside benefit (Index return minus equities return) when equities are down, and the navy blue bars show the cost of that protection when equities are up (equities return minus Index return), defined as upside cost. We then plot the net result, calculated as downside benefit minus upside cost.

Figure 1: The Buffer Index versus S&P 500: historic upside cost and downside benefit (unweighted)

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Source: Bloomberg and Cboe. Date range: December 2005 to February 2026. Past performance is not indicative of future results.

The results shown are broadly positive, as the downside benefit outweighed the opportunity cost of the capped upside, except for beyond 12 months, where the opposite is true. The results show that 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 (GFC), COVID, and 2022’s inflationary episode where the protection barrier is breached and downside participation moves in lockstep. Although not shown in Figure 1, upside costs were most notable during the extended equity bull runs which followed the GFC, COVID, and 2022’s inflationary episode, where a cap on the upside was particularly painful.

How often was defined protection really needed?

While the data may look attractive over shorter horizons, it doesn’t account for the important fact that the frequency of up and down periods is not symmetric, with equities being up the majority of the time. We show this in Figure 2, where we plot the proportion of up and down periods across different periods. For example, over rolling three-month periods, equities were up nearly 75% of the time.

Figure 2: S&P 500: proportion of up versus down rolling periods

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Source: Bloomberg and Cboe. Date range: December 2005 to February 2026. Past performance is not indicative of future results.

What that means in the context of Figure 1, is that on average, over rolling three-month periods, buffers cost investors (2.0%) three quarters of the time, while only delivering a benefit (2.7%), in the form of downside risk mitigation, for the remaining quarter. The net outcome should also be considered through the lens of this asymmetry, where the opportunity cost of the capped upside is amplified by the fact that broad equities have tended to go up over time, not down, thereby outweighing any benefit from the short-term protection that buffers provided.

Figure 3 underscores the impact of this trade off, with the Buffer Index underperforming equities by 2% per annum, despite having a lower maximum drawdown (-44% versus -56% for equities). In summary, in the absence of timing a short-term equity market correction, buffers appear costly in comparison to the upside that is missed out, which is made worse by the effects of reduced compounding.

Figure 3: Cumulative growth of US$1 (log scale)

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Source: Bloomberg and Cboe. Date range: December 2005 to February 2026. Past performance is not indicative of future results.

Indulging in cakeism? Why trend following may be key

As the above has shown, buffers look to have their benefits offset by their disadvantages, with defined downside benefit coming at the cost of missed upside. However, does this always have to be the case?

To illustrate that it does not, we replayed the same analysis for the portable alpha construct, which combines 100% S&P 500 exposure and 100% trend-following exposure, and plot the results in Figure 4. Details of this construct can be found here. The first observation is that, unlike the Buffer Index, there looks to be no inherent upside cost, with portable alpha having enhanced returns during up markets over the majority of horizons by adding a second layer of return via the trend-following allocation. Secondly, while the downside risk mitigation is less pronounced over shorter time horizons, it has been more pronounced over longer windows. This aligns with our previous findings that trend following has historically performed well during more sustained drawdowns, lasting months or longer, such as the dot-com bubble, GFC and 2022. In our view, these are arguably the drawdowns which investors care most about, rather than smaller market corrections, which have (recently) been followed by a swift recovery.

Figure 4: Portable alpha versus S&P 500: historic upside cost and downside benefit (unweighted)

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Source: Bloomberg and Société Générale. The portable alpha construct consists of a 100% allocation to equities and a 100% allocation to trend. Trend is represented by the SG Trend Index. Equites are represented by the S&P 500 Index. Date range: December 2005 to February 2026. Simulated past performance is not indicative of future results.

Outwardly, the benefits of providing downside risk mitigation without capping the upside present the portable alpha construct as return-enhancing when compared to equities, while buffers appeared to be more return-sacrificing. This distinction is shown in Figure 5, which compares both portable alpha and the Buffer Index alongside equities over a longer timeframe.

Figure 5: Cumulative growth of US$1 (log scale)

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Problems loading this infographic? - Please click here

Source: Bloomberg, Société Générale, and Cboe. Date range: December 2005 to February 2026. The portable alpha construct consists of a 100% allocation to equities and a 100% allocation to trend. Trend is represented by the SG Trend Index. Equites are represented by the S&P 500 Index. Past performance is not indicative of future results.

Unlike the Buffer Index, which in our analysis suffers from the effects of reduced compounding, the portable alpha construct outperformed equities by nearly 2% per annum, while also having reduced the maximum drawdown (-49% versus -56% for equities).

Importantly, while the maximum drawdown is higher than that of the Index, on a volatility-adjusted basis it came in lower than both the Index and equities, however, you don’t have the benefit of a defined outcome.

Concluding thoughts

While it is clear that buffers have delivered on their objective in our study, the inherent cost associated with achieving that objective may be less clear to investors. This effect compounds and therefore may make buffers challenging to own over the long term as that upside cost stands to grow larger. In our view, and based on the analysis we provide here, a portable alpha construct, which combines beta with trend following (to seek crisis protection), has historically delivered similar downside benefits over the long term while adding to portfolio growth rather than subtracting. However, it is important to note that, unlike buffers, the portable alpha construct is susceptible to lower downside mitigation over the shorter term as it does not benefit from the buffer protection option strategy. Additionally, results will vary depending on the underlying strategy of the alpha component.

To frame it in a different way, whether you can have the cake and eat it too, is not necessarily a yes or no answer as it might all come down to risk appetite and the personal situation of an investor.

Prospective outcomes are based on the analysis provided of historic data and are not guaranteed. All investments involve risks, including possible loss of capital. This is not financial advice or an investment recommendation. Before making any investment, an investor should thoroughly review any proposed confidential offering documents with their professional advisor(s) to determine whether an investment is suitable for them.