What is a buffered ETF?​

A buffered ETF is a type of investment fund that uses options (a kind of financial contract) to limit how much an investor can lose if its reference asset (usually a broad-based market index) goes down. At the same time, it allows investors to earn some gains if the market goes up—though there’s usually a limit to how much you can earn.  

Think of it as having a "safety net" built into your investment. As it relates to the ARK Defined Innovation Exposure Term (“ARK DIET”) Buffered ETFs, the downside is capped at 50%, while the upside potential is limited to 50-80%. (Please see ARK DIET’s prospectus for complete fund structure.)  For example, if the reference asset drops 20%, a buffered ETF might only lose 10%, because the "buffer" absorbs the first part of the loss. However, in exchange for this protection, there is often a cap, or a set upside participation rate, on how much of the market’s gains an investor keeps when it goes up. 

Buffered ETFs can be especially useful for investors who want to stay invested in the market but are nervous about big losses.