Options-based Exchange-Traded Funds (ETFs) have seen a substantial surge in popularity, reaching an estimated $120 billion in assets by 2025. These investment vehicles provide a simplified entry point for individuals to engage in sophisticated options strategies, even without a deep understanding of calls and puts. However, it is crucial to assess their actual performance, fee structures, and inherent risks to determine if they align with an investor's objectives.
These ETFs offer two primary approaches for generating returns or managing risk. Covered call ETFs hold underlying stocks and simultaneously sell call options against these holdings. This strategy aims to generate regular income from option premiums, but it also means investors might forgo some potential gains during strong bull markets. On the other hand, buffered ETFs utilize options contracts to safeguard against a predetermined percentage of market losses, typically between 10% and 15%. This protection comes at the cost of capping potential upside gains, leading to more predictable outcomes over specific periods.
Covered call ETFs, also known as "buywrite" ETFs, have accumulated approximately $75.2 billion in assets, characterized by an average expense ratio of 0.80%. Their appeal lies in their ability to convert market volatility into income by owning stocks from major indices and systematically selling call options. Research indicates that this strategy performs best in sideways or moderately rising markets, where ETFs can benefit from both modest stock appreciation and option premiums.
However, recent analyses, such as one from ProShares in May 2025, highlight a significant drawback. Over the past decade, covered call ETFs experienced nearly the same percentage of losses as the broader market during downturns (84% of losses) but captured only a fraction of the gains during rallies (65%). For instance, during the S&P 500's 32% decline in early 2020, the Cboe S&P 500 BuyWrite Index fell by 29%, challenging the perception of substantial downside protection. This suggests that the income generated from options premiums often isn't sufficient to mitigate rapid market sell-offs, and investors sacrifice significant upside potential by selling call options.
Buffered ETFs have also experienced rapid growth, with assets under management expanding from $4.6 billion in August 2020 to $43.4 billion, with an average expense ratio of 0.77%. These funds are designed with "outcome periods," usually lasting 12 months, during which they aim to provide specific financial results. For example, an investor might be protected from the first 15% of market declines but have their gains limited to 18%, even if the market rises by a greater percentage.
The performance of buffered ETFs has been mixed. From 2020 to 2025, they delivered an average return of 11%, falling short of the S&P 500's 14.5% during the same period, according to Morningstar analysts. Nevertheless, they largely succeeded in their stated goal of limiting downside risk. In 2022, when the S&P 500 dropped by 18%, buffered ETFs from First Trust and Pacer lost 7.7% and 4.0%, respectively, effectively reducing portfolio volatility. However, their gains in bullish markets are typically capped at about three-quarters of the broader market's performance. For example, the TrueShares Structured Outcome January ETF (JANZ) returned 18.1% in 2024, compared to the S&P 500's 25.0%.
Moreover, a 2025 study by AQR Capital analysts found that 90% of defined outcome funds underperformed a simple combination of stocks and cash. They posited that investors might achieve similar results by merely reducing their equity exposure and allocating more to cash or bonds, thereby avoiding the higher management fees associated with these specialized ETFs.
Both covered call and buffered ETFs offer sophisticated investment options for those seeking income generation or risk mitigation. While they simplify access to complex options strategies, investors must consider their trade-offs. Covered call ETFs may not provide robust downside protection in volatile markets, and buffered ETFs cap potential gains while still incurring higher fees. Ultimately, these fees can erode long-term portfolio growth, making it essential for investors to weigh the benefits against the costs and assess their suitability for individual financial goals.