PHDG has a 97.5% allocation in stocks and 2.5% in the CBOE Volatility Index, or VIX. [PowerShares Readies ‘Downside Hedged’ ETF]
“Clearly the momentum has been with stocks, which is why the index is heavily weighted in equities at this time. If we start to see equities falter and volatility pick up, the portfolio will start to shift toward a more balanced allocation that will act as a hedge against the core stock exposure,” Fabian writes. “One of the drawbacks to a strategy such as PHDG is that it will underperform in a strong equity uptrend like we have experienced in 2013.”
He notes that Barclays S&P 500 Dynamic Veqtor ETN (NYSEArca: VQT), an exchange traded note, is a competitor to PHDG.
“As of today PHDG has only accumulated $66 million in total assets but I would not be surprised to see that number climb if stocks turn south,” he said. “This ETF will likely see strong inflows in the event of a sustained correction or bear market similar to asset flows into a traditional inverse fund such as the ProShares Short S&P 500 ETF (NYSEArca: SH).” [Short ETFs See Inflows on Fears Market Set for a Fall]