Buffer ETFs: AQR's Case for an Investment Failure

In a stark rebuke of a popular investment trend, AQR Capital Management has labeled buffer ETFs an “investment failure,” arguing these products fail to deliver on their promises of “magical equity returns without equity risk.” The research firm’s analysis of 99 options-based strategies found that only 14% outperformed a simple S&P 500/Treasury bill mix over five years, while 81% suffered worse drawdowns. With $53 billion in assets under management and a reputation as “boomer candy” among retirees, buffer ETFs face mounting scrutiny over their structural flaws, high fees, and inconsistent performance.

The Buffer ETF Mirage

Buffer ETFs, which use options contracts to cap losses (e.g., a 15% downside buffer) while allowing unlimited upside, surged in popularity after the 2020 market rebound. Innovator U.S. Equity Buffer ETFs (JOBF) and other similar products attracted investors seeking safety without sacrificing growth. But AQR’s research reveals a harsh reality: their complexity often outweighs their benefits.

AQR’s study highlights a critical flaw in the annual reset mechanism. After a market decline, these ETFs reset their buffer at the new lower price, shrinking future upside caps. For example, a fund with a 10% buffer that navigates an 18% downturn leaves investors exposed to an 8% loss. Worse, subsequent rebounds are measured against the diminished starting value, compounding losses over time.

The Cost of Complexity

High fees exacerbate underperformance. Buffer ETFs charge an average 0.77% expense ratio, nearly double the 0.10% for the SPDR S&P 500 ETF (SPY). These costs, combined with tax inefficiencies from annual resets—which trigger capital gains outside retirement accounts—erode returns further.

AQR’s data shows the average dollar invested in buffer ETFs earned 10.7% annually through February 2025, slightly outpacing the ETFs’ aggregate 9.4% return. But this gap reflects investor timing: inflows skewed toward market upswings, creating an artificial boost. Over full market cycles, buffer strategies underperform diversified, low-cost portfolios.

The Drawdown Dilemma

The promise of downside protection rings hollow during sustained volatility. When equities fell in early 2023, the S&P 500 dropped 16%, while buffer ETFs with 15% protections still lost 1% on average. Meanwhile, a simple 60/40 stock-bond portfolio (e.g., SPY + AGG) held losses to 7%.

Structural Flaws vs. Marketing Hype

Proponents argue buffers provide “certainty” for retirees, but AQR counters that their rigid mechanics clash with market realities. Volatility spikes, like those driven by AI-driven trading or geopolitical tensions, raise the cost of options, forcing future buffers lower.

“The math is unavoidable,” said AQR’s Daniel Villalon. “These products are structured to underperform over time, yet they’re marketed as safe havens. Investors are paying for complexity they don’t need.”

The Broader Implication

AQR’s critique extends beyond buffer ETFs to the entire market-linked product ecosystem, including structured notes and annuities. All embed hidden costs and timing risks, often obfuscated by marketing. As volatility rises, such products may struggle further—especially if central banks continue raising rates, squeezing option premiums.

Conclusion: Simplicity Wins

AQR’s analysis leaves little room for optimism. With 86% of buffer ETFs failing to beat a basic S&P 500/T-bill portfolio, and 81% suffering worse drawdowns, the evidence is clear: simplicity outperforms complexity. For retirees and income-focused investors, AQR advocates low-cost, globally diversified portfolios—like 60% S&P 500 (SPY) and 40% intermediate Treasuries (IEF)—which offer better risk-adjusted returns without the traps of options-based strategies.

The verdict? Buffer ETFs may be a “marketing success,” but for investors, they’re a costly illusion. As Villalon warns, “There’s no free lunch in finance—and these products charge a premium for a meal that’s half empty.” In a world of rising market chaos, the safest path remains the oldest rule: diversify, keep costs low, and let time work in your favor.