The Buffer Battle: AQR vs. BlackRock in the Defined Outcome ETF War

The ETF industry is rarely short on drama, but the 2025 clash between AQR and BlackRock over buffer strategies has ignited a philosophical firestorm. At stake is nothing less than the future of defined-outcome ETFs—products designed to shield investors from losses while capping gains. Let’s dissect the arguments and explore why this debate matters for investors.

AQR’s Case: Buffer Funds Are Overhyped and Underperforming

AQR, a quantitative powerhouse known for its rigorous analytics, has launched a withering critique of buffer ETFs. Their core argument: these funds fail to deliver on two critical fronts.

First, performance in bull markets has been lackluster. During the 2020–2025 equity rally, buffer ETFs lagged behind the S&P 500. While their downside protection is contractual—shielding investors from the first 10–20% of losses—their capped upside means they can’t keep pace with soaring markets. AQR’s data shows that in 2021 alone, the top S&P 500 stocks outperformed buffer ETFs by an average of 22 percentage points.

Second, methodological flaws plague the analysis. AQR’s dataset includes 99 funds, but critics argue this mix is skewed. It bundles early-stage buffer ETFs launched during the chaotic 2020 market crash, narrow “10% buffers,” and non-buffer strategies like covered-call ETFs. As Vest Financial, the pioneer of the category, points out: “Comparing a 10% buffer to a 20% buffer is like pitting a bicycle against a Tesla.”

BlackRock’s Counter: Buffers Are a Behavioral Lifeline

BlackRock, the world’s largest asset manager, defends buffers as a paradigm shift in investing. Their stance hinges on three pillars:

1. Growth and Institutional Adoption: Defined-outcome ETFs now hold $62 billion in assets (March 2025), with BlackRock projecting this to surge to $650 billion by 2030. Advisors are increasingly allocating 13% of client portfolios to these products, signaling a shift from niche to mainstream.
2. Behavioral Resilience: BlackRock cites Prospect Theory, which highlights humans’ 2.5x aversion to losses over gains. Buffers reduce panic selling by eliminating the fear of losing capital—the top reason investors abandon long-term plans.
3. Structural Innovation: In a world where stocks and bonds are increasingly correlated (as seen in 2022’s simultaneous declines), buffers offer true diversification. Their “contract-based” design—using derivatives to guarantee outcomes—provides certainty traditional portfolios lack.

The Flawed Metrics Debate

AQR’s use of traditional metrics like beta and drawdowns has drawn sharp criticism. Buffers are nonlinear strategies, meaning their payoff structures defy linear risk metrics. For instance, a buffer ETF might have a beta of 0.5 but still deliver full downside protection—a nuance lost in AQR’s analysis.

BlackRock counters that buffers aren’t meant to outperform equities but to protect investor psychology. As one advisor noted: “My clients don’t care about beating the S&P—they care about not losing their kids’ college fund.”

BlackRock’s stock has risen 40% since 2020, reflecting confidence in its strategic bets, including outcome ETFs.

Why Buffers Are Here to Stay

The debate isn’t just academic—it’s a clash between philosophies of risk. AQR represents the traditionalist view: optimize returns while managing volatility. BlackRock and Vest champion a goal-based approach, prioritizing psychological safety and long-term adherence to plans.

Data supports the latter’s case:
- $43 billion of the $62B buffer AUM is managed by Vest, whose funds have delivered 100% downside protection in 8 of the past 10 years.
- Post-2008 studies cited in the debate show that higher capital buffers correlate with fewer financial crises, a point Vest uses to argue for systemic stability.

Conclusion: Buffers Redefine Risk for a New Era

The buffer debate isn’t about right or wrong—it’s about what risk means in an era of correlated markets and behavioral pitfalls. While AQR’s critique highlights valid concerns about overhyped marketing, BlackRock’s vision of buffers as a behavioral anchor aligns with investor needs.

With $650 billion in projected growth by 2030, buffers are no gimmick. They’re a response to a world where traditional diversification fails, and loss aversion drives decisions. Advisors who dismiss buffers risk missing a tool that could make the difference between a client’s retirement success and panic-driven failure.

From $1 billion in 2012 to $62 billion in 2025—a 62x expansion, underscoring the strategy’s adoption curve.

In the end, buffers may not outperform equities in bull markets. But in a world where fear drives more decisions than logic, their value is undeniable.