Limit Losses With These ETFs

The catch: You’ll give up some gains in return.

- NELLIE S. HUANG

INVESTING IN STOCKS CAN seem like walking a tightrope without a safety net. A new breed of exchange-traded funds aims to change that. These funds, called buffered or defined-outcome ETFs, absorb a portion of stock market losses in exchange for capping some of the gains. “This is a solution for investors who want to protect on the downside,” says Ryan Issakainen, head of ETF products at First Trust Advisers.

Other investments, such as low-volatility stock funds, also promise to cushion against market gyrations. But buffered ETFs, by investing in one-year options linked to a broad benchmark, differ in that they set exactly how much in losses—9%, 10%, 15%, 20% or 30% before fees, depending on the fund—shareholders are protected from over a 12-month period.