If this is your first taste of market turmoil at a point in life when you feel you have enough to lose, welcome. You now join generations of investors that have been through it. And if you are no stranger to stock market gyrations, you realize that this one feels just a bit different. For both groups of investors, this is a time when understanding the full range of ETFs out there is critical, including those structured to play defense when the SDPR S&P 500 ETF (SPY), Vanguard S&P 500 ETF (VOO), iShares Core S&P 500 ETF (IVV), and Invesco QQQ Trust (QQQ) are cratering in value.
The two ETFs highlighted here approach their mission to “play defense” with more balance than a straight “inverse ETF.” Here’s a pair of ETFs built to profit in up markets, but with some type of trap door to run through at times of market stress.
ETF #1: Invesco S&P 500 Downside Hedged ETF (PHDG)
The Invesco S&P 500 Downside Hedged ETF (PHDG) is a testament to a bad habit you still have time to correct. Don’t ignore its existence until it’s too late.
In its 13th year, this fund has the distinction of being one of few ETFs that can make this claim: There has not been a one-month (“rolling”) period in which it has lost 10% from peak to trough. The S&P 500 Index ($SPX), by contrast, has lost as much as 33% in a month’s time. Yet PHDG has only about $110 million in assets under management.
How does this ETF do it? It starts out similar to popular index funds, by owning all the stocks within the S&P 500. But it pairs that basket of stocks with CBOE Volatility Index ($VIX) futures.
When markets plunge, the VIX typically surges in price, which allows those “long volatility” futures to offset a lot of the S&P 500’s downside risk. PHDG may also hold a slug of cash.
The “cost” of this ETF is the potential for its strategy to get whipsawed when the stock market drops sharply, then reverses quickly back up. This type of “V-shaped recovery” is what temporarily impacted PHDG immediately following the 2020 pandemic crash, which occurred over 5 weeks to the downside, but jumped back to life within a relatively short time frame.
The fund’s expense ratio is 0.42%, or $42 on an initial $10,000 investment, which can easily be rationalized as the cost of protecting against significant downside. This is not an ETF that is intended to serve as a long-term anchor of a portfolio, but it can be considered for those who want to conveniently package defense and offense together in one ticker, one trade.
ETF #2: Aptus Collared Income Opportunity ETF (ACIO)
The Aptus Collared Income Opportunity ETF (ACIO) debuted in August 2019. That turned out to be just in the nick of time for shareholders. It limited losses to about one-third of the S&P 500’s aforementioned 33% drop amid the pandemic breakout. That was an excellent stress test for this ETF.
ACIO’s active management team owns a stock portfolio that typically numbers between 50 and 80 names. It sells covered calls against many of those. But it takes an additional step of buying put options against the S&P 500 Index. That combination of selling calls and buying puts, known as a “collar,” helps cushion the blow in down markets, while adding another source of income via option premiums.
One indication of this ETF’s steadiness is indicated by what seems to be a rarity in performance tracking. Its 1-year, 3-year, and 5-year annualized performance are all within 1% of 10%. That doesn’t happen without some level of proactive risk management.
As is the case with PHDG above, ACIO modulates downside, but it should not be expected to go up in down markets. It is still a stock portfolio at the center of the action.
Both of these ETFs aim to do one thing very well: Take the risk out of taking a risk.
The stock market has shown some of its greatest moments of vulnerability since 2020. But investors do not have to resort to timing strategies, being stuck with deep losses from traditional index funds, or hoping that bonds will offset stock market risk. The ETF universe offers many ways to pursue lower-correlation paths to long-term objectives.
