Structured Perspectives part 1: Buffer ETFs and Defined Autocalls
- nataliemcnab8
- 2 hours ago
- 8 min read
This is a marketing communication for professional investors only. Capital at risk.
Outcome-based investment strategies have gained popularity on both sides of the Atlantic for their ability to define investment exposure in terms of pre-defined outcomes (both upside and downside), while offering investors a more predictable journey.
These strategies come in different forms. Structured products have been popular investment vehicles globally for more than two decades and have been used to deliver a variety of outcome-based strategies, the autocall being the most prevalent. In Europe, collectivised investments (such as UCITS funds) have become popular alternatives to structured products for accessing index-based versions of Defensive Autocalls over the last decade, offering the benefits of tax management, scalability and limited credit risk. Managers of these types of collective vehicle have built them by replicating autocall exposure synthetically using institutionally priced derivatives, rather than buying structured products directly.
In contrast, the US market has seen a rapid rise in the issuance of Buffer ETFs over the past seven years, which are most comparable to the index-based autocalls and funds now available in Europe, and are themselves a type of outcome-based investment. We estimate the current assets in these types of products to be approximately US$76 billion at the end of October 2025 (ETF Action, 05/10/2025)
While Buffer ETFs also offer predefined outcomes, their underlying construction, volatility sensitivity, and strategic value differ from those of the typical index-based autocall.
Types of outcome-based investment strategies
Outcome-based investments can use a variety of underlying assets in response to investor demand. In common, they all have a fixed term and a clear, formulaic return linked to one or more underlying assets.
This note is part 1 of a series that explores the differences between the two most popular types of outcome-based investments, Defensive Autocalls and Buffer ETFs, focusing on payoff design, volatility exposure, and market exposure.
Buffer ETFs explained
Buffer ETFs typically aim to provide equity index exposure (often the S&P 500) over a fixed period. They offer capped participation to the index should it rise over the period, with an additional downside buffer should the index fall.
Typical upside cap
Approximately 15% annual return potential
Downside buffer
Protection against the first 10-20% market decline
Maturity period
1-year maturity period for each underlying contract
Payoff profile
Here is an example of a Buffer ETF against the underlying index to show how the payoff at maturity is often illustrated:
What makes up a Buffer ETF?
The table below shows the different components that make up a typical Buffer ETF structure, illustrating how each instrument contributes to the overall risk and return profile.
Instrument | Purpose | Equity market exposure? | Direction | Approx Delta at inception | Equity volatility exposure? | Direction | Vega at inception |
Long 1% Strike Call | Give 1:1 exposure to the index | Yes | Long | 100% | No | N/A | |
Short 115% Strike Call | Cap upside | Yes | Short | -20% | Yes | Short | -0.30% |
Long (At-The-Money Put) | Provide downside protection | Yes | Long | -50% | Yes | Long | 0.40% |
Short 85% Strike Put | Cap downside protection | Yes | Short | 20% | Yes | Short | -0.30% |
Total | Yes | Long | 50% | Yes | Short | -0.20% |
Source: Atlantic House
Defensive Autocalls explained
Defensive Autocalls also provide equity exposure, where initial capital is protected down to a specified index level and returns are delivered through fixed coupons that are contingent on the reference index or indices remaining above pre-defined levels.
They are typically structured over periods of five years or more, with the potential to mature early (autocall) each year if the reference index or indices exceed the specified index level. The key distinctions between these investments and Buffer ETFs lie in the fixed investment term and conditional early maturity.
Typical upside cap
Normally 7-8% annual return potential
Downside buffer
30-40% protection against market decline
Maturity period
5-year maturity period
Payoff profile
Here is an example of a Defensive Autocall against the underlying index to show the potential payoff at maturity, as shown below:
What are the building blocks of a Defensive Autocall?
The building blocks of a Defensive Autocall are similar to those of a Buffer ETF, but with a few important differences.
Instrument | Purpose | Equity market exposure? | Direction | Approx Delta at inception | Equity volatility exposure? | Direction | Vega at inception |
Zero Coupon Bond | Return capital | No | N/A | No | N/A | ||
Long a strip of contingent digital call options | Provide upside from autocall barrier levels | Yes | Long | 10% | Yes | Long | 0.00% |
Short At-The-Money Put with a low barrier | Create downside risk | Yes | Short | 30% | Yes | Short | -1.00% |
Total | Yes | Long | 40% | Yes | Short | -1.00% |
Source: Atlantic House
Understanding Delta, Vega and market volatility
To understand what impacts the performance of these investments, we must first understand the factors influencing their price.
Delta: Sensitivity to price changes
Delta measures a derivative’s sensitivity to changes in the price of its underlying asset.
A Delta of 50% means that for every 1% move in an underlying asset (such as the S&P 500), you would expect the value of the derivative to move by 50% of that 1% i.e. 0.5% or 50 basis points.
Vega: Sensitivity to volatility
Vega measures the sensitivity of a derivative instrument to movements in expected future annualised volatility of its underlying asset and is normally expressed in terms of a percentage move for a 1% move in the volatility of the underlying.
A Vega of 0.4% means that for every 1% change in the expected annualised volatility of the underlying asset (such as the S&P 500), the value of the derivative is expected to change by 0.4%.
Daily moves and the VIX
As a rule of thumb, an asset that moves 1% per day will realise an annualised volatility of around 16%. Something that moves 2% per day will effectively double and realise around 32%. The VIX is a market estimate of expected volatility over the next month. Consequently, if the VIX moves from 16% to 32%, it means that it is expected that the S&P 500 will move around 2% per day for the next month, rather than 1% per day.
The role of Delta and Vega in Buffer ETF performance
Instrument | Purpose | Equity market exposure? | Direction | Approx Delta at inception | Equity volatility exposure? | Direction | Vega at inception |
Total | Yes | Long | 50% | Yes | Short | -0.20% |
We have seen that Buffer ETFs typically have a 1-year maturity period for each underlying contract, and you can see from the above table that they are overall “short volatility” at inception, but not by much – only around 0.2%. To put this figure into context, one-year volatility on the S&P 500 is currently around 18%, and even during the peak of the tariff noise on the 8th of April 2025, it still only reached 22%. Given this limited volatility exposure, it is unlikely volatility movements will have much impact on the price of a Buffer ETF. The Delta, however, is approximately 50% at inception as per the above, and consequently, it is the market moving up and down that will have the greater impact on the price of the Buffer ETF.
The role of Delta and Vega in a Defensive Autocalls performance
Instrument | Purpose | Equity market exposure? | Direction | Approx Delta at inception | Equity volatility exposure? | Direction | Vega at inception |
Total | Yes | Long | 40% | Yes | Short | -1.00% |
Defensive Autocalls, such as those in the Atlantic House Defined Returns Fund, typically target annual returns of around 7–8%, slightly below the maximum potential return of a typical Buffer ETF (15%). This aligns with their lower Delta, reflecting reduced sensitivity to movements in the underlying asset. However, their Vega exposure is almost five times higher, largely due to longer potential maturities. As a result, Defensive Autocalls often carry greater short volatility exposure than Buffer ETFs, making them more sensitive to changes in volatility.
Volatility risk premium (VRP)
Historically, selling volatility (or being short volatility) has been a consistent source of excess return. Why is this? Conceptually, selling volatility is similar to selling insurance; an investor in Buffer ETFs or Defensive Autocalls becomes a volatility seller and effectively underwrites protection against a significant market decline.
This dynamic is akin to traditional insurance markets. Why do insurers make money? Providers (such as car or home insurers) typically collect more in premiums than they pay out in claims over time. Likewise, in capital markets, sellers of downside options receive compensation in the form of premiums that often exceed the actual cost of realised losses over time. In financial markets, this phenomenon is known as the volatility risk premium, the empirically observed tendency for implied volatility to trade at a premium to realised volatility.
Buffer ETFs benefit from this to a small degree, but Defensive Autocalls carry more short volatility exposure. This means they tend to benefit more than do Buffer ETFs from the volatility risk premium when implied volatility remains above realised volatility.
Conclusion
In summary, Defensive Autocalls and Buffer ETFs both forgo some element of uncapped equity index performance in return for some downside protection and, in the case of Defensive Autocalls, positive performance in the event of markets falling to some degree. Defensive Autocalls and Buffer ETFs both offer defined outcomes but differ mainly in investment horizon and structure. Buffer ETFs assess index performance over one year, while Defensive Autocalls typically span five or more years, offering equity-like returns with partial capital protection. Unlike Buffer ETFs, these have longer potential time horizons and conditional early redemption features. For example, the Defensive Autocalls found in the Atlantic House Defined Returns Fund target a 7–8% net return over six years, with capital at risk if indices fall more than 35%. The similarities and differences between the two types of investment can be summarised in the table below:
Parameter | Buffer ETF | Defensive Autocalls |
Term | Usually one year | Usually 5+ years |
Protection | Usually the first 10% to 15% fall in the market. | Usually the first 30% to 40% fall in the market. |
If protection is breached | Loses 1% for everyone 1% fall from protection level. | Loses 1% for every 1% fall from the index start level. |
Potential upside | Linear return linked to the first 10% to 15% of any market rise. i.e. market must go up for a positive return to be made. | Fixed return if the positive return barrier is not breached, which is usually lower than the index start level. i.e. the product can make money even in the event of the market falling to some degree, |
Market exposure (Delta) | Approx 50% at inception | Approx 40% at inception |
Volatility exposure (Vega) | Minimal | Short volatility |
For illustrative purposes only.
Look out for Part 2 and Part 3 of our Structured Perspective series, where we will explore the Volatility Risk Premium and the Equity Risk Premium in a clear, digestible way to show how Defensive Autocalls derive their value.
Important information
This is a marketing communication issued by Atlantic House Investments Limited and does not constitute or form part of any offer or invitation to buy or sell shares. It should be read in conjunction with the Fund’s Prospectus, key investor information document (“KIID”) or offering memorandum. Atlantic House Investments Limited is authorised and regulated by the Financial Conduct Authority FRN 931264. Atlantic House Investments Limited is a Private Limited Company registered in England and Wales, registered number 11962808. Registered Office: One Eleven Edmund Street, Birmingham. B3 2HJ.
The contents of this article are based upon sources of information believed to be reliable. Atlantic House Investments Limited has taken reasonable care to ensure the information stated is accurate. However, Atlantic House Investments Limited make no representation, guarantee or warranty that it is wholly accurate and complete.
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