Key Takeaways:

• Buffer ETFs seek to absorb a defined portion of market losses in exchange for a cap on gains over a set period.
• The buffer and cap are designed for investors who hold for the full outcome period, and partial-period holders may see different results.
• Buffer ETFs may help investors stay invested through volatility, but they are not guaranteed products and losses are possible.
• VanEck U.S. Equity Buffer ETF - July (JULV) offers exposure to U.S. large cap equities, resetting annually in July.

Most investors know that staying invested is the key to long-term returns. Doing it is harder. Sharp drawdowns test conviction, and selling near the bottom can do lasting damage to a financial plan. Buffer ETFs were designed to address that very human problem. By defining in advance how much loss a fund seeks to absorb and how much gain it can capture over a set period, they offer a more predictable equity experience that can make volatility easier to live with.

What is a Buffer ETF?

A buffer ETF is a fund that uses options to reshape the return of an equity index over a defined period of time, often one year. In exchange for capping the upside at a set level, the fund seeks to absorb a defined amount of the index's losses before an investor is exposed to further declines. Because the downside buffer, the upside cap and the time period are all set at the outset, these strategies are also known as defined outcome strategies. They do not try to beat the market. They try to deliver a known, narrower range of outcomes than holding the market directly.

The Four Building Blocks

Every buffer ETF is defined by four simple parameters:

• Reference asset: The index or ETF whose price the outcomes are based on, often the S&P 500 through an S&P 500 ETF.
• Buffer: The amount of loss, measured from the start of the period, the fund seeks to absorb before the investor takes on further declines. Common buffers range from 9% to 20% or more.
• Cap: The maximum return the fund can earn over the period. This is the cost of the buffer. To pay for downside protection, the fund gives up gains above the cap.
• Outcome period: The window over which the buffer and cap apply, typically one year, after which the fund resets with a new cap.

The Fund’s 20% buffer is measured before fees and expenses; the Fund's 0.50% management fee and any other fund expenses reduce it, so a shareholder's actual buffer over an Outcome Period is less than 20%.

Buffered outcome ETFs use investment strategies that differ from more typical products and may not be suitable for all investors. Before investing, please carefully read the prospectus to understand the fund’s strategy and associated risks.

How a Buffer ETF Reshapes Returns

A buffer ETF typically holds a basket of options (specifically, FLEX Options, which are customizable, exchange-listed options) on the reference asset, all expiring on the last day of the outcome period. It can be helpful to picture the strategy as three layers working together. The first layer provides exposure that moves roughly one-to-one with the reference asset. The second layer is a pair of put options that creates the downside buffer. The third layer is a sold call option that funds the cost of that buffer and, in doing so, creates the upside cap. The combined result is a return profile that is reshaped relative to simply owning the index: flatter on the downside within the buffer and capped on the upside.

The table below illustrates the mathematical effect of applying a hypothetical 20% buffer and 12% cap to various assumed reference-asset returns. Note that the buffer and cap are designed to be realized only by investors who hold from the first day of the period to the last. If you buy shares after the outcome period has begun, the buffer and cap that apply to your investment will reflect the index's movement since the period started. For example, if the index has already risen 5%, your effective cap for the remainder of the period would be approximately 7%, not 12%. Similarly, the remaining buffer may be smaller if the index has already declined.

Illustration of the Mathematical Effect of a Hypothetical 20% Buffer and 12% Cap

Hypothetical illustration for educational purposes only, assuming a 20% buffer and a 12% cap, before fees and expenses. It does not represent the performance of any fund and outcomes are not guaranteed.

For illustrative purposes only. This example applies assumed reference-asset returns to a hypothetical 20% buffer and 12% cap solely to demonstrate the mathematical operation of a defined-outcome strategy. The assumed reference-asset returns are not predictions or projections, and the illustration does not represent or project the performance of JULV or any other fund. Actual returns will differ and are subject to fees, expenses and other factors.

The Trade-offs of Using a Buffer ETF

A buffer is not free, and a buffer ETF is not a substitute for cash or a guaranteed product. Four points to keep in mind:

• The cap limits your upside. In a strong year, a buffer ETF will trail their reference asset. The protection is paid for by capping gains.
• The outcome holds over the full period. The buffer and cap are designed to be realized by investors who hold from the first day to the last. Buying or selling partway through can produce a very different result.
• The buffer is a target, not a guarantee. Buffer ETFs do not provide principal protection. In a severe decline, an investor can still lose money.

What Happens at the End of an Outcome Period?

There is nothing an investor needs to do. At the end of each period, the fund rolls into a new set of options, a new cap is set based on market conditions at that time, and the buffer resets relative to the fund's value at the start of the new period. The ticker, the fund and the strategy stay the same, while the cap and the reference point refresh. Because the strategy resets rather than matures, a buffer ETF can be held indefinitely across many outcome periods.

How Buffer ETFs Have Performed in Market Declines

A buffer is easier to evaluate once market declines are put in historical context. Drawdowns are a normal feature of equity investing, not a rare event. Historically, the S&P 500 has experienced a correction of 10% or more roughly every one to two years,¹with deeper declines also having occurred regularly across market cycles. Pullbacks are simply part of the experience of owning equities. What matters for long-term investors is staying invested through them.

History also puts the cap side of the trade-off in perspective. Over the long run, the S&P 500 has delivered an average annual return of roughly 11%,¹ though individual years vary widely around that average. That long-run figure is a useful reference point when weighing a cap: in a typical year, a cap set above the long-run average leaves room to capture much of the market’s return, and what the investor gives up is concentrated in the strongest years. Neither the frequency of past declines nor the long-run average return guarantees future outcomes, but together they help frame both sides of the exchange a buffer ETF offers.

Why Investors Use Buffer ETFs

The most important benefit of a buffer may be behavioral. Knowing that a defined amount of loss is buffered can make it easier to stay invested through a downturn rather than selling at the worst possible moment. The math of recovery reinforces the point: a portfolio that falls 50% needs to gain 100% just to break even, while a buffer that absorbs some of that decline leaves far less ground to recover. By narrowing the range of outcomes, buffer ETFs aim to smooth the ride and help investors stay focused on long-term goals.

How Buffer ETFs Can Fit in a Portfolio

Buffer ETFs sit between cash, bonds and unhedged equities on the risk spectrum, making them flexible building blocks. Three common uses:

• Reduce equity risk. Replace a portion of an equity allocation with a buffered position to keep market participation while seeking to soften drawdowns.
• Add equity participation. Reallocate from cash or bonds into a buffered position to pursue more growth potential while keeping a level of downside management.
• Smooth the experience for nervous capital. Buffer ETFs are useful for investors approaching or in retirement, or for those who have difficulty in periods of general market volatility.

The Advantages of the ETF Wrapper

Defined outcome strategies once lived mainly inside structured notes and certain annuities. Delivering them in an ETF brings the familiar advantages of the wrapper: intraday liquidity, transparency into the strategy and its current values, potentially favorable tax treatment, low cost and no exposure to the credit of a single issuing bank or insurer. The options are issued and guaranteed for settlement by the Options Clearing Corporation, a central clearinghouse, rather than by a single counterparty.

VanEck's Approach to Buffer ETFs

The VanEck U.S. Equity Buffer ETF - July (JULV) applies these principles to U.S. large-cap equities. It seeks to track the price return of the S&P 500, via options on the SPDR^® S&P 500^® ETF Trust, up to a cap, while buffering against the first 20% of losses over an approximately one-year outcome period that resets each July.