U.S. stocks notched an impressive rally last Friday, but even with a gain of nearly 1.2%, the S&P 500 is still down 6.6% over the past month.
With volatility on the rise, some investors have been looking for ways to exploit that trend while protecting long equity positions. Profiting from volatility has again turned into a hot topic with the iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) up nearly 42% in the past month. However, some investors have been previously frustrated by volatility exchange traded products.
Investors should also be aware that VIX-related ETFs are designed to track CBOE Volatility Index futures contracts, not the VIX spot price. Consequently, traders can lose money on this trade when longer-dated contracts are more expensive than the front-month contract, or when markets are said to be in “contango.” [Survive Market Swings With These ETFs]
Enter the PowerShares S&P 500 Downside Hedged Portfolio (NYSEArca: PHDG). PHDG, which will celebrate its second anniversary in December, takes a straightforward approach to offering investors downside protection. Complementing PHDG’s 85% allocation to equities is a 15% weight to various volatility index, or VIX, futures.
That combination is not a guarantee of gains in turbulent market environments. With that said, PHDG has been noticeably less bad than broader market in recent weeks. Over the past month, the ETF is down less than 1%.
PHDG’s underlying index, the S&P 500 Dynamic VEQTOR Index, has sharply outperformed the HFRX Global Hedge Fund Index this year and over the past 12 and 36 months, according to issuer data. [ETFs for a Market Pullback]
The rub with ETFs that offer hedges and downside protection is that these funds typically lag straightforward equity funds in over bull markets. However, this year’s 3% gain for the S&P 500 has been anything but easy. That has worked in PHDG’s favor as the ETF has posted a 4.4% year-to-date.
Investors are clearly warming to PHDG’s story. Last week, the ETF took in almost $21.5 million, a total surpassed by just three other PowerShares ETFs. For the year, PHDG has more than doubled size, a status reserved for a small amount of ETFs.
PowerShares S&P 500 Downside Hedged Portfolio
