New ETF ‘Always Hedged & Invested’

Today, Swan Global Investments, a newcomer to the ETF space, launched a risk management fund that incorporates an options-based hedging strategy.

The Swan Hedged Equity US Large Cap ETF (HEGD) looks to combine a passive index-based strategy with an active risk management approach, according to Portfolio Manager and Managing Director Micah Wakefield.

HEGD comes with an expense ratio of 0.87% and lists on Cboe Global Markets, the parent company of ETF.com.

“There’s a great demand from the marketplace for having some kind of downside risk solution,” said Wakefield, noting the market turmoil resulting from the coronavirus pandemic.

How HEGD Works

The fund is actively managed and mainly holds ETFs tracking the S&P 500 Index, but 10-15% of the fund is invested in options on the ETFs or the S&P 500 Index, primarily for hedging purposes.

The prospectus notes that the defined risk strategy used by the fund was developed by Swan Global Investment's president Randy Swan, which relies on long-term put options to hedge the portfolio and on call options to provide enhanced returns by adding to the fund’s returns or mitigating risk. However, the fund can also implement spread option strategies as needed, according to the prospectus.

The options strategies allow the fund’s managers to both protect against significant downside loss (left tail) and allow for enhanced upside participation (right tail). HEGD’s strategy is expected to outperform in downward-trending markets and participate in upside in upward-trending markets to a lesser degree, but Wakefield notes that it is likely to trail the S&P 500’s performance when the market is locked in a sideways pattern, as was seen in 2015, largely due to the cost of holding the hedge.

Importance Of Staying Invested

Swan’s motto appears on its homepage and reflects HEGD’s strategy: “Always Invested, Always Hedged.” That means investors can remain invested in the market while knowing they are unlikely to bear the full brunt of any losses in exchange for some of the upside they would otherwise experience.

Swan offers a similar strategy to that of HEGD in both separately managed account and mutual fund wrappers, with their track records dating back to 1997 and 2012, respectively.

“The power of compounding really only kicks in if you stay invested for a long period of time instead of getting in and out,” Wakefield noted, pointing out that the equity markets are similar to a roller coaster.

“The goal of a hedged equity approach is to smooth out that roller coast ride,” he added. “The goal is to come out with a disciplined, repeatable, transparent process that allows investors to stay invested.”

Contact Heather Bell at [email protected]