By Suzanne McGee
(Reuters) -Investors are increasingly taking refuge from the tumultuous U.S. stock market by pouring into a type of exchange-traded fund that offers a tradeoff, a cap on potential gains in return for a cushion against possible losses.
Over the past month, as the market has pulled back sharply, “buffer” ETFs have seen $2.5 billion of inflows, according to CFRA Research. The category has seen $4.7 billion of inflows so far this year, as the benchmark S&P 500 stock index has declined 6%.
On Monday, the S&P 500’s biggest drop of the year, such buffer ETFs pulled in $140 million in net assets, according to CFRA.
“At some point, the stock market party had to stop,” said Dinon Hughes, a partner at Nvest Financial, a financial planning firm in Portsmouth, New Hampshire. Hughes began redeploying some of his clients’ stock market holdings into buffer ETFs last year as equity valuations rose and his anticipation grew that his clients would confront choppy markets and selloffs.
Buffer ETFs, which are offered by asset managers like Innovator Capital Management, BlackRock and Allianz Investment Management, use options to put limits on how much an investor will lose in a market selloff. The protection is financed by selling other options that remove the potential for unlimited gains if the market roars higher.
The extent of potential gains depends on the market backdrop, with higher volatility environments translating into lower upside potential as investors give up potential profits in exchange for more protection.
Financial advisors like Hughes are increasingly attracted to them as a way to persuade clients not to abandon stocks in a turbulent environment.
“A year ago, we were reaching out to them to tell them and their clients about the concept,” said Graham Day, chief investment officer of Innovator. “Now we’re the ones answering calls from them, as they try to take some chips off the table.”
In a survey of advisors conducted last week, Innovator found that 82% of advisors polled were more worried about stocks than any other asset class.
Stocks have sold off in recent weeks as investor worries about the economic outlook are exacerbated by uncertainty over President Donald Trump’s tariffs.
“When you have these jolts, it creates a new level of both uncertainty and urgency,” said Johan Gran, head ETF market strategist of Allianz. “Volatility spikes have always existed, of course, but now we have one big surge in volatility coming from the new administration.”
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