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How does a buffered product work in an up market?​

In an up market (when prices of underlying stocks are rising), a buffered ETF lets investors benefit from gains—but not all of them.

Here’s why: 

  1. First, there is usually an upside hurdle—a percentage of gains that you don’t receive. For ARK DIET ETFs, that’s the first 5% of gains. So, if the underlying ETF, in this case ARKK, goes up 5%, the buffered ETF generally returns 0%.
  2. After that hurdle, investors get a portion of the remaining gains. For example for ARK DIET, if ARKK goes up 20%, the ARK DIET ETFs have a 50-80% participation rate. Therefore, investors generally would receive up to 80% of (20% – 5%), or 80% of 15%, which equals a 12% return. 

This structure is made using a combination of call options: 

  • A short call (sold by the fund) sets the hurdle and funds downside protection.
  • A long call (bought by the fund) allows the ETF to participate in upside after the hurdle. 

In summary: 

  • Investors may miss some early gains.
  • Investors participate in the rest, but at a partial rate (for ARK DIET, generally 50–80%).
  • There’s no limited upside—but your participation is reduced, after the initial hurdle.