Many investors are growing cautious about Wall Street’s winning momentum due to a moderate rise in jobless claims that sparked worries about the health of the U.S. labor market, as well as the escalating geopolitical tensions in the Middle East.

If you see uncertainty in Wall Street in the near term, you can rely on Buffer exchange-traded funds (ETFs) (also called Defined Outcome ETFs). Examples of such ETFs are Innovator U.S. Equity Power Buffer ETF – July (PJUL Quick QuotePJUL - Free Report) , FT Vest U.S. Equity Buffer Fund – February (FFEB Quick QuoteFFEB - Free Report) , Innovator U.S. Equity Power Buffer ETF – September (PSEP Quick QuotePSEP - Free Report) and AllianzIM U.S. Large Cap Buffer20 Jul ETF (JULW Quick QuoteJULW - Free Report) .

ETFs like PJUL, FFEB, PSEP and JULW have returned 11.7%, 13.6%, 10.6% and 10.6%, respectively, so far this year. Let’s first delve a little deeper into the economic backdrop and then discuss how buffered ETFs could be helpful in such a scenario.

Inside the Moderate Health of the U.S. Labor Market

Weekly Initial Jobless Claims for the week ending Sept. 28 were 225,000, an increase of 6,000 from the previous week's revised level, according to data the Labor Department released on Thursday. The number is above the average economist estimate of 221,000, per the data from Benzinga Pro, as quoted on Yahoo Finance.

However, U.S. private payrolls increased more than expected in September, boosted by hiring in the construction, leisure and hospitality industries. Private payrolls increased by 143,000 jobs last month after rising by an upwardly revised 103,000 in August, the report showed. Economists polled by Reuters had forecast private employment would rise by 120,000 after a previously reported gain of 99,000 in August.

Escalating Geopolitical Tensions

Tensions in the Middle East escalated on Wednesday following an Iranian missile attack on Israel, sparking demand for safe-haven assets as investors grew anxious about the potential expansion of the conflict (read: Should You Invest in Oil ETFs on Rising Middle East Tensions?).

On Wednesday, Iran claimed that its missile attack on Israel, the largest military assault on the Jewish state, was over unless further provoked. Israel and the United States promised retaliation as fears of a broader war intensified. Israel reported that over 180 ballistic missiles had been fired by Iran, in retaliation for Israeli military actions in Lebanon against Hezbollah.

What Are Buffer ETFs?

Buffer ETFs are a type of exchange-traded fund that aims to protect investors from a certain percentage of market losses (the "buffer") while still allowing for some participation in market gains. These funds are designed for investors who want some downside protection but don't want to miss out on potential market growth entirely.

Here’s How Buffer ETFs Work

A buffer ETF provides protection up to a certain level of loss over a specific time period. For example, a fund might offer a 10% buffer. If the market falls by 8%, the ETF will protect investors from that drop. However, if the market falls by more than 10%, investors will still incur losses for any amount exceeding the buffer.

These ETFs cap the potential gains. If the market rises massively, you only get returns up to a pre-specified limit. For example, if the ETF has a cap of 15% and the market rises by 20%, your return will be capped at 15%.

The buffer and cap normally apply to a specific time period, often one year. After that, the ETF "resets" for a new time period with new buffer and cap levels. These ETFs generally track broad market indices, like the S&P 500, but use options strategies (such as buying and selling options contracts) to create the buffer and cap structure.