For investors nearing or in retirement, navigating the delicate balance between capital preservation and growth can be a tightrope walk. While holding ample cash provides comfort during market downturns, it risks missing out on potential gains. Enter the buffer ETF, a unique investment vehicle offering shelter from storms while still allowing a path to sunshine.

These ETFs, also known as defined outcome ETFs, employ options to create a buffer against market declines. A typical fund might protect holders against, say, the first 9% of losses. But just like insurance, this protection comes at a price.

Unlike regular ETFs that track an index precisely, buffer ETFs also cap their upside potential. So, if the market soars, the fund will only capture a percentage of that gain. It's a trade-off: limited sunshine for guaranteed cover during rain.

Of course, buffer ETFs aren't a magic bullet. Their complexities require careful research. Fees, the specific buffer and cap levels, and the underlying index all affect their performance. As popular as the concept has become in recent years, more than 200 of these funds now exist offering a wide range of features. For advisors looking for a way to offer their clients downside protection, buffer ETFs are worth a look.

Finsum: A new category of exchange traded funds, buffer ETFs, has been growing in popularity due to their downside protection and ability to share in upside gains.