Liquid alternative exchange-traded funds (ETFs), namely derivative income and defined outcome offerings, have demonstrated remarkable asset growth in line with the broader success of the tax-efficient ETF wrapper. Investors value the downside risk protection and steady income generation offered by these strategies, according to the latest Cerulli Edge—U.S. Product Development Edition.

Derivative income ETFs, known for providing consistent income and an enhanced yield via options selling, have driven key flows for alternative ETFs—in 2023 alone, the category attracted more than $26 billion in net inflows, followed by an additional $29 billion in 2024. Advisor adoption and ETF issuer product development serve to further bolster growth within derivative income ETFs. In 2024, 15.2% of surveyed advisors reported incorporating derivative income strategies into portfolios, with another 7% planning to adopt such strategies.

Meanwhile, the defined outcome ETF landscape has grown immensely since the launch of the first product in 2018. Since then, the category has amassed $50.8 billion in net assets as of 1Q 2025 and posted a 93% five-year compound annual growth rate (CAGR) as of 2024, the third-highest after digital assets (261%) and derivative income ETFs (123%).

“The success of such products reflects increasing investor demand for downside protection, emphasizing stable, predictable outcomes, especially during bouts of market volatility,” says Sally Jin, analyst.

However, Cerulli finds just 13% of asset managers offering alternative investment strategies say they currently offer defined outcome ETFs, with no additional managers currently developing the strategy or looking to develop it in the future. Furthermore, just 10% report having defined outcome ETFs as a primary focus. Nevertheless, given the recent market drawdowns of 1Q 2025, it is possible that this sentiment may shift with the allure of downside risk protection in times of uncertainty.

“Ultimately, while derivative income and defined outcome ETFs have broadened access to alternative exposures and have enjoyed significant asset gathering over the past several years amid market volatility, challenges to adoption and concerns around performance, fees, and suitability remain,” says Jin. “Both derivative income and defined outcome ETFs should continue to be evaluated against the backdrop of market conditions and investor preferences. It is likely that both derivative income and defined outcome ETF product development will continue to advance as ETF issuers fine-tune their offerings and enter or widen the space,” she concludes.