Despite some recent strength in the markets, there is still a
great amount of risk from a variety of sources. Surging threats
from the emerging and developed economies have added fuel to the
fire, pushing some investors to consider less risky
Exchange-Traded Funds have been very helpful in assisting
investors with obtaining low risk choices, particularly in
changing market conditions. Options now exist that hedge out
riskier stocks, or even add in a volatility component as well
Three Hedge Fund ETFs for Uncorrelated
The latest addition in this corner of the market comes to us
from VelocityShares, a company best known for its volatility
, is now branching out into the hedged equity world. The latest
funds from this company, which we have described in greater
detail below, have a sophisticated long/short volatility strategy
combined with a large cap equity allocation.
VelocityShares Tail Risk Hedged Large Cap ETF (
TRSK seeks to reflect the performance of the VelocityShares
Tail Risk Hedged Large Cap Index before fees and expenses. The
fund takes a net long position in large-cap equities, and a (net)
short position in VIX futures.
For this exposure, the ETF charges 71bps in fees. This makes
the fund a bit more expensive than unhedged products, though
cheaper than many of the other leveraged or pure volatility funds
currently on the market (also see
Which Volatility Hedged ETF Should You
At present the fund holds just a handful of securities. The
top 3 holdings are actually ETFs; Vanguard
S&P 500 ETF (
SPDR Trust Series 1 (
iShares Core S&P 500 ETF (
. The trio contributes 85% to the fund, leaving the rest for 2x
long volatility (5.55%), and inverse volatility (9.45%).
The approach is designed to hedge "tail-risk" in the S&P
500, potentially making it a lower risk choice during turbulent
market times. However, in rising markets, the ETF could
underperform as the volatility component could push this product
below unhedged funds.
VelocityShares Volatility Hedged Large Cap ETF (
SPXH seeks to reflect the performance before fees and expense
of the VelocityShares Volatility Hedged Large Cap Index, which
hedges "volatility risk" in the S&P 500. The fund takes a
long position in the S&P 500 and a (net) long position in
short-term VIX futures.
With this approach the fund tries to target a net neutral
exposure, though this can fluctuate during trading sessions.
Investors should also note that for this holding profile, the
fund charges 71bps in fees (also see
Hedge Your Portfolio with the Equity Bear ETF
At present SPXH holds just a handful of securities as well.
Once again, ETFs comprise the bulk of the exposure with the
Vanguard S&P 500 ETF, iShares Core S&P 500 ETF and the
SPDR Trust Series 1 accounting for 85% of the fund. The
remainder goes to volatility with 3.9% going to 2x volatility,
and 11.1% to inverse volatility.
This approach looks to hedge "volatility risk" in the S&P
500. The strategy could also be ideal during sluggish market
conditions, but like its TRSK counterpart, could underperform
during rising market environments.
The Bottom Line
Despite somewhat high fees, the two could be interesting picks
for investors seeking to hedge out some broad market risks from
their portfolios. The inclusion of volatility can potentially
make these outperformers during uncertain market environments,
acting as protection in turbulent times .
However, when stocks are doing well and risk levels are low,
these types of funds may underperform broad markets. Not only are
they more expensive, but volatility doesn't have a good track
record during these time periods, suggesting that these funds
should be the focus only of those who are looking for heightened
volatility levels, or broad market uncertainty to continue (also
Why I Hate Volatility ETFs
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ISHARS-SP500 (IVV): ETF Research Reports
VELSH-VOL HDG (SPXH): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
VELSH-TAIL RSK (TRSK): ETF Research Reports
VEL-2X VIX ST (TVIX): ETF Research Reports
VANGD-SP5 ETF (VOO): ETF Research Reports
VEL-INV VIX ST (XIV): ETF Research Reports
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