They are both correct grammatically but mean slightly different things. An obstacle is a difficult instance that one must overcome to continue moving forward. An obstacle slows a person or adds difficulty to life. A set back is an actual loss.
For example, there are obstacles to opening a business like securing loans, permits, and finding a good business model. A set back would be, after overcoming all those obstacles, having the business burn down.
Arguably setbacks can be obstacles in life, yet obstacles are not setbacks.