By now, investors well know that equities have been volatile this year, but that does not mean the effort to skirt volatility should be confined to traditional safe-havens such as government bonds and gold. Some exchange traded funds can help investors mitigate downside risk while maintaining long equity exposure.
Non-traditional, alternative asset-based exchange traded funds can help investors diversify away from traditional stocks and bonds, providing uncorrelated returns that can help generate better risk-adjusted returns.
The PowerShares S&P 500 Downside Hedged Portfolio (NYSEArca: PHDG) is a prime example of such an ETF. PHDG 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.
The rub with ETFs that offer hedges and downside protection is that these funds typically lag straightforward equity funds in over bull markets. The upside is that PHDG is less bad when stocks fall as highlighted by its 1.3% year-to-decline. That compares with a loss of almost 2.5% for the S&P 500.
“As of Feb. 12, 2016, the PowerShares S&P 500 Downside Hedged Portfolio has total net assets of $343.2 million with 507 holdings. The fund’s top five holdings are 15.37% in CME E-Mini Standard & Poor’s 500 Index Future expiring in March 2016, 13.29% in CBOE Volatility Index Future expiring in March 2016, 2.23% in Apple, 1.72% in CBOE Volatility Index Future expiring in February 2016 and 1.72% in Microsoft,” according to Investopedia.
For conservative investors, PHDG is a superior alternative to VIX-based exchange traded products, which come with an array of risks that some investors should look to dodge. 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]
PowerShares S&P 500 Downside Hedged Portfolio
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.