Hedged equity strategies offer valuable drawdown mitigation, a boon in the volatile market environment of 2025. While sharp market declines create pain for equity portfolios, the impact is often magnified for those investors near or beginning retirement. Hedged equity ETFs appear well positioned for all investors this year, but particularly for anyone concerned about near-term downside volatility.
“It’s a simple but powerful mathematical fact: The steeper the drawdown experienced by an investment, the larger the subsequent return an investor needs to recover those losses,” Sean McWillians, PM, hedged equity strategy, and Christopher Murphy, CIMA, head of ETF specialists at T. Rowe Price, explained in a recent paper.
In this year’s tumultuous market environment, sharp declines have not always been met with equal or greater recovery. With ongoing volatility driven by uncertainty this year, risks still remain elevated heading into the second half. Tariff levels, inflation, interest rates, geopolitical risks, and more all loom over markets in the back half of the year.
For those close to retirement, sharp market declines can force a restructuring of assets to account for portfolio losses. When timing matters, trading some upside capture for protection against losses could prove invaluable. Hedged equity ETFs can help to mitigate these losses, preserving capital while providing peace of mind. Given the environment of elevated risk this year, hedged equity ETFs could prove a boon for all investors, and particularly for those nearing retirement.
Hedged equity strategies seek to mitigate drawdowns while also benefiting from equity returns and growth. The recently launched T. Rowe Hedged Equity ETF (THEQ) combines a variety of risk mitigation strategies within one fund while also seeking to participate in market returns. The strategy includes stocks with lower volatility profiles, equity index put options, short positions in U.S. stock futures, and more to mitigate risk. These collectively help to create a smoother ride within equities.
For its core stock market exposure, THEQ invests in the T. Rowe Price U.S. Equity Research ETF (TSPA ), a fund that retains the style and risk profile of the S&P 500 but with active management benefits. THEQ’s actively managed strategy also keeps it dynamic in changing market environments. The PMs can adjust the risk overlay to respond to emerging risks, offering flexibility in uncertain times. THEQ carries a competitive expense ratio of 0.46%.
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