A number of hedged exchange traded funds (ETFs) have become available to investors in recent years, with a variety of strategies aimed at limiting downside exposure while also limiting the fund’s upside. These funds have become increasingly popular of late, particularly as volatility has picked up with the coronavirus pandemic.
Although volatility has slowed down in recent months due to fiscal and monetary stimulus measures, and investing in such ETFs have turned out to be poor investments given the negative impact a ceiling on returns has had in this recent bull market run, smoothing out returns is something a lot of investors choose to do.
This is likely to continue to be the case long-term, as the risk tolerances of investors range across a spectrum. Those with the lowest risk tolerance may be more attuned to such funds, and with valuations across the entire stock market now hitting ridiculous levels, it could be anticipated more capital inflows into these funds could drive outperformance relative to naked, or unhedged, funds.
Personally, my take on hedged funds is that the upside that gets taken away is often not worth the downside protection. Ensuring one has access to the long-term over performance of equities relative to other asset classes is important, so investors ought to be careful with holding these funds for extended periods of time. If, however, one becomes very bearish on the near-term expectations of the market, such funds could be valuable in the short-term as hedging strategies.
Invest wisely, my friends.
