PHDG Is Another Take On Low-Risk ETFs

December 08, 2012


Sure enough, the light blue S&P 500 Dynamic Veqtor Index spikes upward during the downgrade event, more than erasing the 17 percent by which it lagged the S&P up to that time.

But the holding period return over the whole range from VQT’s inception through Dec. 6, 2012 highlights the downside of downside hedging: The S&P 500 beats the S&P 500 Dynamic Veqtor Index by about 9.9 percentage points. I’d guess that without the August 2011 event , this difference would have been even more dramatic.

The point is that this sophisticated risk mitigation technique appears to come with an utterly unsurprising catch: significant underperformance in up markets.

VIX Futures

A second chart adds the performance of the VIX index in dark gray and VIX futures in light gray.


SP500 vs PHDG Index plusVIX


The first point here is that VIX futures track the VIX poorly over time, and generally lead nowhere but down in the long run. The S&P 500 Dynamic Veqtor Index has exposure to VIX futures, not to the VIX itself, which is uninvestable.

The saving grace is the “dynamic” in the S&P 500 Dynamic Veqtor Index—it does not maintain a large fixed weight in VIX futures. Still, anyone consider either PHDG or VQT needs to have some inkling of how VIX futures perform.

In the end, I’m guessing that PHDG will offer some protection against major market upsets, just as VQT has done to-date.

As for PHDG versus VQT, I’d look hard at the spreads and your intended holding period before deciding if PHDG’s lower fee really pays off, and don’t forget the age-old counterparty risk versus tracking issue for VQT.

If I had to invest in one of them soon, I’d stick with VQT until fledgling PHDG gets some traction.

At the time this article was written, the author had no positions in the securities mentioned. Contact Paul Britt at [email protected].


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