Volatility Hedged

Volatility-hedged funds and ETFs invest the majority of their assets in equities,... Volatility-hedged funds and ETFs invest the majority of their assets in equities, but also invest in equity derivatives. The derivatives component is designed to offer a hedge (i.e. downside protection) in the event that the equity market experiences a correction. Typically, a fund like this purchases a long position in volatility futures tied to the so-called VIX Index, which measures implied volatility in the stock market. If the VIX rises (which usually happens when the market falls), these futures contracts will increase in value—somewhat offsetting the decline in the equity portion of the portfolio. The advantage to these funds is that they offer both exposure to a rising stock market but also some protection if the market falls significantly. However, in a bull market, the volatility hedge will act as a drag on performance, meaning that an investor would have been better off simply owning stocks. Volatility-hedged funds and ETFs are appropriate for sophisticated investors who understand the trade-offs involved with these products. Last Updated: 11/04/2024 View more View less

Volatility-hedged funds and ETFs invest the majority of their assets in equities, but also invest in equity derivatives. The derivatives component is designed to offer a hedge (i.e. downside protection) in the event... Volatility-hedged funds and ETFs invest the majority of their assets in equities, but also invest in equity derivatives. The derivatives component is designed to offer a hedge (i.e. downside protection) in the event that the equity market experiences a correction. Typically, a fund like this purchases a long position in volatility futures tied to the so-called VIX Index, which measures implied volatility in the stock market. If the VIX rises (which usually happens when the market falls), these futures contracts will increase in value—somewhat offsetting the decline in the equity portion of the portfolio. The advantage to these funds is that they offer both exposure to a rising stock market but also some protection if the market falls significantly. However, in a bull market, the volatility hedge will act as a drag on performance, meaning that an investor would have been better off simply owning stocks. Volatility-hedged funds and ETFs are appropriate for sophisticated investors who understand the trade-offs involved with these products. Last Updated: 11/04/2024 View more View less