Many investors are struggling to find the right balancing act in the current market environment.
U.S. equity markets continue pushing to new all-time highs despite persistent inflation, elevated valuations, geopolitical uncertainty and higher interest rates.
These risks can make investors uncomfortable as markets rise and fall — sometimes in the same trading session.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
But history suggests that all-time highs alone aren’t a reason to step away, and new ETFs that help investors stay invested through highs and lows are growing in popularity.
Markets rise
New market highs tend to cluster together during prolonged bull markets.
From 1989 to 2000, the S&P 500 reached a new all-time high roughly every nine trading days. From 2013 to 2022, it was every eight trading days.
In 2026, it has hit a new all-time high over 20 times as of June — roughly once every five to six days.
Still, many investors have chosen the perceived safety of cash. According to the Investment Company Institute, assets in money market funds stood at $7.9 trillion as of July 22.
These investors have missed out on significant upside and may continue to do so. But at the same time, they cannot afford to ignore the downside risks markets currently present.
Markets also decline
Significant market declines can delay retirement, force spending changes or derail major goals like buying a home or affording higher education for children.
Declines can also undergo long periods: Look at the NASDAQ-100. It took nearly 15 years (March 20, 2000, to April 23, 2015) to fully recover from its prior peak after the tech bubble.
Many investors don’t have that kind of recovery horizon, creating tension between participating in market growth and managing downside risk. It’s a key challenge, but remaining on the sidelines doesn’t have to be the answer.
This is where defined outcome ETFs, designed to help investors navigate unease and return to the market, can be one solution.
What are defined outcome ETFs?
Defined outcome ETFs seek to provide investors with equity market participation while limiting an initial level of losses over a specified outcome period, typically in exchange for reduced upside potential.
With strategies available across different underlying assets, protection levels and growth-oriented objectives, investors can choose an approach that best reflects their individual goals and time horizon.
While the market’s direction will remain uncertain, having clearer parameters around potential gains and losses may provide the confidence needed to stay invested when volatility rises.
Defined outcome ETFs may be particularly relevant for investors approaching a major financial transition, such as retirement, who still need equity growth but have less capacity to recover from a significant drawdown.
Two defined outcome-oriented ETF approaches that have gained traction in today’s environment are buffer ETFs and managed floor ETFs.
Buffer ETFs: Participate in market gains with a defined buffer against losses
Buffer ETFs may appeal to investors who want to maintain market exposure while seeking protection against an initial portion of losses over a specified period.
Typically tracking an underlying index like the S&P 500, Nasdaq-100 or Russell 2000, these ETFs provide participation in the index’s gains up to a predetermined cap.
Common buffer levels (or standard amounts of downside protection) are 9%, 15%, 20% or 30% over a defined period, often three, six or 12 months. This means that if the index declines by less than the stated buffer over the outcome period, the ETF is designed to absorb that loss; if the decline exceeds the buffer, the investor remains exposed to losses beyond it.
The tradeoff is that buffer ETFs cap how much of an index’s gains an investor can capture. For example, if the ETF has a 10% cap, and the index rises 13% over the outcome period, the investor’s return would be limited to 10%, before fees and expenses.
These ETFs are often used for assets tied to shorter-term spending needs, frequently serving as an alternative for capital that may be needed within the next one to three years.
Managed floor ETFs: Stay invested with a built-in floor against declines
Managed floor ETFs, on the other hand, may appeal to investors who still need long-term equity growth potential but desire a strategy that is designed to reduce the impact of a severe market decline.
Unlike buffer ETFs, which seek to absorb an initial portion of losses over a defined period, managed floor ETFs are generally designed to tolerate shallow declines and step in with greater protection when markets begin to fall more sharply.
The strategy combines equity exposure with an options overlay intended to hedge against deeper losses while often maintaining meaningful upside potential.
The options positions are laddered across different expiration dates and renewed systematically. As a result, the fund’s effective floor can change over time and may be higher or lower than its approximate target at any particular point.
Tradeoffs? Because the floor is maintained through active decisions rather than a fixed contract, protection can vary; the fund may still be repositioning when a rebound starts, missing part of the upside.
These funds also tend to carry higher costs and offer less predictability than buffer ETFs.
Don’t want to pick a market movement side? Consider managing tension
Buffer ETFs provide defined protection over a set period in exchange for a capped upside. Managed floor ETFs take a different approach, seeking to limit deeper losses while often maintaining meaningful participation when markets rise.
Neither ETF eliminates risk nor replaces a financial plan created around specific goals and timelines.
But both offer a way to stay invested with more clarity about what’s protected and possible rather than an all-or-nothing approach to market risk.
