The Sequence of Returns Risk Shield: An Educational Guide to Buffered ETFs in Early Retirement

For those in the FIRE (Financial Independence, Retire Early) community, the biggest threat to a 40-year retirement isn't just inflation—it's Sequence of Returns Risk. This is the danger that a major market crash occurs in the first few years of your retirement, forcing you to sell stocks at the bottom to fund your life.

As of early 2026, Buffered ETFs (also known as Defined Outcome ETFs) have grown into a powerhouse asset class with over $82 billion in Assets Under Management (AUM). These funds allow retirees to build a mathematical "shock absorber" directly into their brokerage accounts to defend against market volatility.

Buffered ETFs do not own stocks directly. Instead, they use FLEX Options (Flexible Exchange Options) to create a specific return profile over a one-year "Outcome Period." Think of it as an agreement with the market: You receive a Buffer (downside protection) in exchange for accepting a Cap (a limit on your potential gains). Recent reports highlight the latest developments and performance updates for these ETFs (see References).

1. The Protection Spectrum: 10% to 100%

Buffered ETFs use options to create a specific return profile over a one-year "outcome period." Depending on your specific cash needs, you can choose your level of defense:

• Moderate Buffer (10%–15%): Funds like BUFF protect against the first 10-15% of market losses. They are generally used to replace a portion of standard S&P 500 holdings to "smooth out" the ride.

• Deep Buffer (20%–30%): Funds like DAUG or BJAN are designed for major corrections. If the market drops 25%, a 30% buffer fund would essentially stay flat. These are the "Sweet Spot" for money you plan to spend 3–5 years from now.

• 100% Protection / Max Buffer: iShares (MAXJ) and Innovator (ZJAN) now offer 100% downside protection over their one-year periods.

  • 2026 Reality: For the period ending June 2026, MAXJ launched with a cap of ~7.06%. If the S&P 500 rallies 20%, you keep ~7%. If the market crashes 40%, you lose effectively 0% (before fees and expenses). Because of the 0.50% fee, an investor’s actual floor in a 100% buffer fund is typically -0.50%, not a true zero.

2. Market Landscape: AUM & Issuers

The rapid growth in AUM signals that these are no longer niche products. The market is currently dominated by two giants:

• First Trust (FT Vest): Leads the market with roughly 49% market share ($40B+ AUM), specializing in monthly-resetting buffer series.

• Innovator ETFs: Holds about 37% market share ($30B+ AUM). Their recent partnership with Goldman Sachs has further cemented their place in institutional portfolios.

• BlackRock (iShares): While a newer entrant, their "Max Buffer" series (like MAXJ) has quickly become a favorite for those seeking a "step up from cash" with 100% protection.

3. Key Technical Considerations

Before investing, early retirees must account for the structural trade-offs:

• The "Fee Drag": Standard index funds cost roughly 0.03%. Buffered ETFs typically cost 0.75% to 0.85% (though MAXJ is a competitive 0.50%).

• Dividends: These ETFs track the Price Return of the index. While some now offer a small distribution, you generally lose out on a significant portion of the S&P 500's dividend yield.

• Intra-Period Risk: Protection only applies if you buy on the Reset Date. If you buy mid-year after the market has already dropped 5%, you are not protected against that initial 5% loss. Always check the "Remaining Buffer" on the fund's website before buying.

4. Implementation: The Bucket Strategy

Retirees often use a "Bucket System" to fit these into a broader plan:

1. Bucket 1 (Years 1–2): Immediate cash needs held in 100% Buffer ETFs (MAXJ) or High-Yield Savings.

2. Bucket 2 (Years 3–7): Mid-term spending protected by 30% Deep Buffer ETFs.

3. Bucket 3 (Years 8+): Long-term growth held in Standard Index Funds (VOO).

Summary & Conclusions

Buffered ETFs offer a middle ground between the safety of cash and the growth of the stock market. Below is a summary of the pros and cons to consider.

The Pros

• Downside Protection: Directly mitigates "Sequence of Returns Risk" by cushioning the portfolio during market drops.

• Defined Risk: Provides a clear "floor" and "ceiling," making it easier to calculate annual withdrawal rates with certainty.

• Behavioral Guardrails: The built-in safety net can prevent panic selling during volatile periods.

The Cons

• Capped Upside: You relinquish the right to full market gains. In a massive bull market, you will significantly underperform.

• High Costs: Fees are 10-20x higher than traditional index funds, and the loss of dividends further reduces total return potential.

• Complexity: Requires tracking "reset dates" and "remaining caps" to ensure you are entering at an efficient price.

Conclusions

As of 2026, Buffered ETFs have become an important tool for risk-managed portfolios. While they are not designed to "beat the market," they serve as a strategic hedge for retirees who prioritize capital preservation over maximum long-term growth.

However, these are complex financial instruments with significant trade-offs in fees and potential gains. Every investor's financial situation, tax bracket, and risk tolerance is unique. You should use your own discretion and, if necessary, consult with a financial professional to consider whether the specific buffer levels and caps of these ETFs are suitable for your personal retirement goals.

References:

• Morningstar: Ptak, Jeffrey. "Buffer ETFs Have Worked for Investors (So Far)." Morningstar Direct, April 7, 2025.

• Russell Investments: "Navigating Volatile Markets: How to Think About Buffer ETFs." Russell Investments Research White Paper, October 22, 2025.