In today’s uncertain markets, investors are no longer content with riding out volatility unhedged. Whether seeking to protect against drawdowns, smooth income, or build more outcome-focused portfolios, derivative-based ETFs are emerging as essential tools. From buffer strategies to income overlays, these vehicles allow investors to stay exposed to markets without giving up control over risk.
According to the 2025 State Street ETF Outlook, over $170 billion is now allocated to options-based ETFs, with more than half of these products launched in just the past two years, a clear signal that investors are demanding more sophisticated risk tools in an accessible wrapper.
The “Death” of the Traditional 60/40 Portfolio
Taking a step back, the conventional 60/40 stock-bond portfolio has come under increasing criticism.
In periods of rising interest rates or simultaneous equity and bond drawdowns, the correlation between the asset classes generally rises, undermining the potential diversification benefits on which the 60/40 portfolio was built. In practical terms, this means investors may not be as protected as expected when markets correct across the board.
This raises questions about how advisors and asset managers are framing risk today. Instead of chasing returns, many are pivoting toward outcome targeting: how much downside can be tolerated, what the investment horizon looks like, and what risks are acceptable for the desired result. Derivative-based ETFs can provide more precise tools to assist advisors and asset managers in tailoring these outcomes more effectively.
The Rise of Active ETFs Using Derivatives to Manage Risk
One of the most important developments reshaping portfolio construction is the rise of actively managed ETFs that use derivatives as core tools.
These funds often deploy options as tactical overlays or utilize futures to fine-tune beta exposure. Their flexibility makes them well-suited to volatile market conditions.
Notably, a growing number of financial advisors are integrating these products into their core models. In a recent PwC global ETF survey, 75% of advisors said they plan to increase their usage of alternative and options-based ETFs for potential downside protection over the next 12–18 months.
The ETF Impact Report 2025 echoes this trend, noting that investors are increasingly allocating to strategies that combine equities with protective derivative structures, particularly those seeking to buffer drawdowns or preserve capital while still participating in growth.
Structured Protection
Defined outcome ETFs, commonly called buffer ETFs, have gained momentum for offering equity exposure with built-in downside protection mechanisms. These products use a mix of protective puts and short call spreads to cap upside in exchange for a defined level of downside mitigation over a set period.
For example, if the S&P 500 declines 15%, a buffer ETF may limit the investor’s loss to just 5%, while still capturing a portion of any upside. This structure has proven especially appealing to retirement-focused investors and those navigating late-cycle markets. The more predictable return profile offers clarity in periods of uncertainty.
Income with Risk Dampening
Another derivative-based approach gaining traction is the use of covered call ETFs. These strategies sell call options on underlying equity positions to generate income, which can help offset downside volatility. While capped upside is a trade-off, the steady premium income can help improve total return in sideways or moderately bullish markets.
Dividend enhancement strategies like these are being used not only for yield, but also as a way to manage equity beta, particularly useful for investors looking to stay invested without fully absorbing market swings.
Making Derivatives Work for Modern Portfolios
Hedging with derivatives is no longer a niche strategy reserved for institutional desks. Through innovations like buffer ETFs, covered-call income funds, and actively managed overlays, derivative-based ETFs are giving mainstream investors access to institutional-style risk control.
Tidal Financial Group is uniquely positioned to support this shift. With deep capabilities in active portfolio management, trading execution, and ETF product design, Tidal helps issuers create solutions that address today’s risk-aware investment mindset. As demand grows for targeted outcomes and smarter risk tools, Tidal’s platform provides the infrastructure to bring these strategies to market.
As volatility becomes the norm, derivative strategies have moved from optional tools to foundational components to modern portfolios.
