There Are Investments That Protect You From Losses. What’s the Catch?

If you’re within a few years of retirement, you’ve probably heard some version of this pitch: “You can get most of the market’s gains and be shielded from most of its losses.” The products go by several names, including market-linked notes, buffered notes, structured notes, fixed indexed annuities, and buffered ETFs, but they all rest on the same promise.

The promise is real, but the protection comes with tradeoffs. What differs is who’s backing it, what it costs you, how much upside you give up and how hard it is to get your money back out.

Three Versions of the Same Trade

• Bank-issued notes. A financial institution issues a note tied to an index like the S&P 500. The contract absorbs some portion of your losses and caps your gains. You hold it until maturity.
• Fixed indexed annuities. The same trade with an insurance company standing behind it instead of a bank. In 2026, competitive caps on the S&P 500 run from 8% to 12% among top-rated carriers.
• Buffered ETFs. Sometimes called defined outcome ETFs, these make the same trade using options, packaged as a fund you buy and sell in a brokerage account. One current example absorbs the first 9% of losses over a one-year period in exchange for a cap of 17.26% after fees.

These Aren’t Scams

All three are legal, regulated products sold by established firms, and they do what their contracts say they’ll do. The important question isn’t whether they’re legitimate. It’s whether the trade-offs are worth it for you.

Bank-Issued Notes (and the Risk Most Buyers Don’t Price)

Wes Moss, a fiduciary financial advisor and host of Ask an Advisor on the Clark Howard Podcast, has been hearing versions of this pitch for a long time.

“When this type of investment is brought up, market-linked notes, buffered notes, whatever you want to call them, they’re financial derivative burritos,” Wes says. “The premise is genuinely intriguing. ‘I’ll give you 70% of the market’s upside with only 20% of the downside’ sounds great on paper.”

However, in practice, Wes has several concerns.

His first objection is that the protection isn’t coming from anywhere special. “Downside protection isn’t magic. It’s just the options market already pricing in that trade-off.” The issuer isn’t giving you anything. They’re buying options with part of your money and handing you the result after taking their cut, so whatever the cap happens to be in a given year simply reflects what those options cost that week.

His bigger concern is who’s standing behind the guarantee.

“Who’s actually backing that promise? It’s the credit of a single financial institution. I lived through Lehman Brothers, one of the biggest names on Wall Street, being a huge issuer of these notes, and when Lehman went under, that ‘protection’ evaporated right along with the company.”

Lehman-issued structured notes marketed as “principal-protected,” but they became unsecured claims in the largest bankruptcy in U.S. history. This meant investors who thought they owned downside protection instead owned a place in line with every other creditor. In other words, the protection was only as strong as the institution that promised it.

“So the capped or downside-protected return is really only as good as the issuer’s credit rating, full stop.”

Getting out early is another problem. “These things are illiquid,” Wes says. “They’re not traded, they’re bought and held to maturity, and if you need out early, you’re selling at a steep discount.”

Fixed Indexed Annuities (and Why Clark Howard Won’t Go Near Them)

The insurance industry’s version of this trade is the fixed indexed annuity. You hand an insurance company a lump sum, your account gets credited interest based on how an index performs, and the contract guarantees you can’t lose principal to a market decline. In exchange, your gains are limited by a cap, a participation rate, or a spread.

That structure solves the single-issuer credit problem only partway, and it introduces a set of problems money expert Clark Howard has spent years warning about.

Clark considers “annuity” close to a curse word. His objection starts with how these are sold. He describes the commissions and fees on most annuity products as massive, humongous, and unconscionable, and he points out that the annuity types he does approve of, immediate payout and longevity annuities, rarely get promoted because they don’t pay salespeople as well.

His advice for anyone on the receiving end of a pitch is blunt.

“When somebody starts talking about an investment they have for you, and they’re not telling you what it is, just ask the question: ‘Is it an annuity?’” Clark says. “If they start hemming and hawing or don’t want to tell you or finally say, ‘Yes, it’s an annuity,’ say ‘Have a nice day’ and walk out the door.”

Beyond the sales practices, indexed annuities carry three structural problems the notes don’t:

• The terms can change after you sign. The insurance company sets the participation rate or the cap, and in most cases it can reset them at each contract anniversary. The 10% cap that sold you on the product can be 5% in year three, and you agreed to that when you signed.
• The lockup is long. Surrender periods commonly run seven to 10 years, with penalties in the 10% range if you break the contract early. Withdraw before age 59½ and you’ll typically owe the IRS another 10% on top of ordinary income tax on your gains. Money you thought was safe is only safe if you can leave it alone for the better part of a decade.
• You don’t get dividends. Returns are credited on index price movement, so a meaningful piece of the market’s long-run return never reaches your account.

Where Buffered ETFs Are Different

The ETF version sidesteps most of the above. It trades on an exchange and can be sold any day the market is open. It holds a portfolio of options rather than an IOU from one institution, so a single firm failing doesn’t wipe out your position. There’s no salesperson commission, no surrender schedule, and the fee is published as a number.

That fee is still higher than a plain index fund. Buffered ETF expense ratios average around 0.78% against roughly 0.03% for a total market index fund.

Timing also matters more than most buyers expect. These funds are built to be held from the start of an outcome period to the end, and a buffered fund won’t track the index in lockstep along the way. It can lag well behind the market at the halfway mark even when it’s working exactly as designed. If you buy midway through a period after the index has already run past the cap, you’re taking on the remaining downside with very little remaining upside.

The Cost That Applies to All Three

Even setting aside credit risk, commissions, and liquidity, the cap by itself is a meaningful drag on returns.

Markets rise in roughly three years out of four, so in a year when the S&P 500 returns 24% and your cap is 10%, you’ve left 14 points behind. The floor pays off in the occasional down year while the cap charges you in most years, and over a 20-year horizon that gap compounds into real money. That’s the main reason none of these products fit well with retirement savings you won’t touch for decades.

When a Slice Makes Sense

Wes stops short of ruling the category out entirely, but he keeps it small.

“For a small slice of a portfolio, sure, I understand the appeal. It’s not automatically wrong for someone. But for a large allocation, I don’t like it. If I want money to be safe, I want it in something simple and liquid, not a complicated derivative stacked with single-company credit risk.”

The trade is most defensible in the few years on either side of your retirement date. A 30% drop the year before you retire is a very different event from the same drop at 40, because you’re about to start selling shares instead of buying them, so protecting a portion of the portfolio through that window addresses a real problem.

The same logic applies to money with a deadline attached, like tuition in four years or a down payment in three, since that money shouldn’t be riding out a bear market it may not have time to escape.

Before You Sign Anything

Find out what the commission is, whether the cap resets each year and who sets the new one, whether dividends are included, and what it costs to get out in year two. Ask for the issuer’s credit rating in writing, and treat any difficulty getting straight answers as part of your answer.

Final Thoughts

Downside protection isn’t free. You’re paying for it with some combination of capped returns, fees, limited liquidity, credit risk or complexity. If that tradeoff helps you sleep better in the years around retirement, it can be a legitimate reason to consider it. But before buying a note or annuity, compare it with a plain CD ladder or short-term Treasurys. These simpler options can provide a measure of safety and predictable returns without the credit risk, surrender schedule or commissions that can come with more complicated products. The key is understanding exactly what you’re giving up for that protection — and making sure it’s worth the price.