How Much Higher Are Buffer ETF Fees?

This content has been reviewed and edited by an Investment Advisor Representative working for Global Predictions, an SEC-registered Investment Advisor.

Buffer ETFs have grown in popularity among investors looking for downside protection while maintaining some exposure to market gains. However, one question that often arises is: How much more do these funds cost compared to traditional ETFs? Understanding the fees associated with Buffer ETFs is crucial to deciding whether they’re worth the investment.

Key Takeaways

• Buffer ETFs offer partial downside protection in exchange for capped upside potential.
• These funds generally have higher expense ratios compared to traditional ETFs.
• Knowing how fees affect your returns over time is key for making an informed decision.

What Are Buffer ETFs?

Buffer ETFs are designed to protect against a specific percentage of market losses—often called a “buffer”—while limiting the gains you can earn during a set period, usually one year. For hypothetical example:

• A Buffer ETF often might protect you from the first 10% of market losses while capping your gains at 15%.
• These funds use options strategies to create their unique risk/reward profiles.

While the concept is appealing, the additional complexity means higher fees compared to standard ETFs that track a market index.

How Much Higher Are the Fees?

The expense ratios for Buffer ETFs typically range from 0.80% to 1.00%, depending on the provider and specific fund. In contrast, traditional index ETFs often have expense ratios as low as 0.03% to 0.10%. 

Why Are Buffer ETF Fees Higher?

1. Complexity of Options Strategies: Buffer ETFs rely on sophisticated options contracts to provide downside protection and upside caps, which involves higher operational costs.
2. Active Management: Unlike traditional index ETFs, Buffer ETFs often require active oversight to maintain their structures.
3. Customization: The tailored nature of these funds, such as varying buffer levels and cap rates, adds to the costs.
4. Hidden Fees: Beyond the expense ratio, investors may encounter additional costs like transaction fees or the bid-ask spread, especially in less liquid Buffer ETFs. For instance, if the bid-ask spread on a $10,000 investment is 0.50%, that’s an additional $50 cost upfront, which can add up over multiple transactions.

Are Higher Fees Justified?

Whether the higher fees are worth it depends on your investment goals and market conditions. Some considerations (pro and con):

• For Risk-Averse Investors: The downside protection can offer peace of mind, especially during volatile markets.
• In Highly Volatile Markets: Buffer ETFs may soften the impact of large market swings, but investors should also consider the capped gains that might limit recovery in a quick rebound.
• In Certain Economic Contexts: Buffer ETFs may be most effective in sideways or low-volatility markets, where partial downside protection and capped gains align well with market behavior.
• For Long-Term Growth: The capped returns might limit your potential in strong bull markets, and the higher fees can eat into gains over time.

Alternatives to Buffer ETFs

If the fees of Buffer ETFs feel too high, here are some alternatives:

• Traditional Index ETFs: These are ideal for investors seeking low-cost, long-term growth.
• Balanced Funds: Combine stocks and bonds for built-in diversification with moderate fees.
• Options Strategies: DIY investors can use options like protective puts to mimic Buffer ETF strategies at a lower cost. For example, an investor might purchase SPY (S&P 500 ETF) and simultaneously buy a put option to protect against downside risk. This strategy requires more hands-on management, but offers flexibility and potential cost savings.