Put Volatility in its Place With This ETF

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.