CUT YOUR LOSSES WITH THESE ETFs

In exchange for portfolio protection during downturns, your gains are capped.

- BY NELLIE S. HUANG

ROCKY markets have put a spotlight on defined-outcome exchange-traded funds, which protect investors from a portion of stock market losses in exchange for capping some of the gains.

These funds, also called buffered ETFs, invest in options linked to a broad benchmark in order to provide a specific amount of downside protection—9%, 10%, 15%, 20% or even 100%—over a distinct time frame called the outcome period, typically one year (though three-month funds are now popular). How much you forfeit in gains depends on the amount of protection the fund offers. The bigger the cushion, the smaller the potential gain. A recently launched PGIM fund tied to the S&P 500 index with 100% protection on losses over one year had a 7% cap on upside returns, while an Allianz ETF with a 10% shield sported a cap of roughly 16%, net of fees.