AI Overvaluation Bothering You? Try Buffer ETFs

The overvaluation concerns in the red-hot artificial intelligence (AI) space, the fear of timing mismatch between massive AI investments and their payoffs, and uncertainty in circular financing in the AI space have been bothering Wall Street for quite some time now. The tech stocks were beaten down last week, taking a toll on the Nasdaq-100 as well as the S&P 500. 

Oracle's ORCL shares plummeted 14% last week as revenues missed expectations, dragging down related AI names like NVIDIA and Micron. Broadcom AVGO fell about 11% despite strong earnings and guidance, intensifying concerns over high capital spending and delayed AI revenue payoffs (read: ETFs to Watch as Oracle Dips Despite Beating on Q2 Earnings).

Are You Worried?

Although many bullish analysts believe that the AI bubble is yet to burst, due to its immense potential for growth and rapid adoption in various industries, sudden, steep, occasional selloffs in the tech space are likely to unnerve retail investors.

Against this backdrop, investors may consider some investment vehicles that strike a balance between growth and protection. One such solution gaining traction is Defined Outcome ETFs. These ETFs normally offer investors downside protection while allowing them to participate in upside market returns, making them a lucrative bet in 2026.

How Are Defined Outcome ETFs Structured?

Defined Outcome ETFs, also known as buffer ETFs or structured outcome ETFs, use options to create a structured payoff profile over a set investment period, typically one year. These ETFs aim to cap the maximum return an investor can achieve in market participation, buffer a specific percentage of losses, usually 10%, 15%, or 20%, and provide transparent outcomes at the start of the investment period.

Chief Investment Officer of Kathmere Capital Management Nick Ryder said defined outcome ETFs are incorporated into some equity strategies to help reduce downside risk. They are often paired with trend-following approaches and covered-call strategies, as mentioned in CNBC.

Goldman Makes Strategic Push Into Buffer ETFs

Goldman Sachs Asset Management is doubling down on defined outcome exchange-traded funds. This month, Goldman has agreed to acquire Innovator Capital Management, a pioneer in defined outcome ETFs, in a deal valued at $2 billion, as quoted on CNBC. The transaction is expected to be sealed in the first half of next year.       

Defined Outcome Exchange-Traded Funds (ETFs) in Focus

FT Vest Laddered Buffer ETF BUFR

The FT Vest Laddered Buffer ETF seeks to provide investors with capital appreciation by providing U.S. large-cap equity market exposure while attempting to limit downside risk through a laddered portfolio of 12 FT Vest U.S. Equity Buffer ETFs. It charges 95 bps in fees. BUFR is up 9.7% over the past six months versus 13.6% returns offered by the SPDR S&P 500 ETF Trust SPY.

FT Vest Laddered Nasdaq Buffer ETF BUFQ

The FT Vest Laddered Nasdaq Buffer ETF seeks to provide investors with capital appreciation by providing investors with large-cap equity market exposure while attempting to limit downside risk through a laddered portfolio of four FT Vest Nasdaq-100 Buffer ETFs. The fund charges 100 bps in fees. BUFQ has added about 9.8% over the past six months.

AllianzIM U.S. Large Cap Buffer20 Dec ETF DECW

The AllianzIM U.S. Large Cap Buffer20 Dec ETF matches the share price returns of the SPDR S&P 500 ETF Trust, up to a specified upside Cap, while providing a Buffer against the first 20% of Underlying ETF losses. The Cap and the Buffer will be reduced after management and other Fund fees and expenses. The current Outcome Period is from Dec. 1, 2024, to Nov. 30, 2025. The fund charges 74 bps in fees. DECW has added about 11.3% over the past six months.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research