More Investors are Utilizing ETFs with Built-In Hedging Strategies

The pandemic only increased the awareness of smart beta funds that utilize built-in hedging strategies without investors having to become self-styled experts in options trading. A couple of funds that are gaining popularity with investors are long-short funds like the AdvisorShares Ranger Equity Bear ETF (HDGE) and the AdvisorShares Dorsey Wright Short ETF (DWSH).

With high unemployment and companies getting ready to report unimpressive earnings thanks to the pandemic, long-short funds are an option. For example, HDGE seeks capital appreciation through short sales of domestically traded equity securities. The Sub-Advisor seeks to achieve the fund’s investment objective by short selling a portfolio of liquid mid- and large-cap U.S. exchange-traded equity securities, ETFs, ETNs, and other exchange-traded products.

The fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in short positions in equity securities. The Sub-Advisor implements a bottom-up, fundamental, research-driven security selection process.

“It’s got a unique investment style where it’s fundamentally driven, has a bit of a forensic accounting approach, but they are looking for opportunities to short where companies could struggle meeting their earnings estimates and earnings guidance,” said Noah Hamman, founder and CEO of AdvisorShares, during an episode of CNBC’s “ETF Edge.” “So, not saying they’re bad companies, but just saying the companies might struggle hitting their numbers, and thus it becomes a good opportunity to profit from a short perspective.”

As for DWSH, the fund seeks capital appreciation through short selling securities. Dorsey, Wright & Associates, LLC (the “Sub-Advisor”), the sub-advisor to the fund, seeks to achieve the fund’s investment objective by obtaining short exposure to investment returns of the broad U.S. large-capitalization equity market by engaging in short sales of U.S.-traded equity securities and exchange-traded funds (“ETFs”).

Under normal circumstances, it invests at least 80% of its net assets (plus any borrowings for investment purposes) in investments that create or result in short exposure to U.S. equity securities.

“You’ll see the portfolio turn over probably quite a bit more in this portfolio, whereas in HDGE, they’re making that fundamental decision,” Hamman said. “But it’s part of our approach to really diversify where you’re getting your alpha exposure.”

Another advantage of using funds like DWSH is that they are “very unemotional, very disciplined, very quantitative in nature.” This, of course, eliminates the emotional component that trips up many investors, particularly during a down or even an upmarket.

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