The Nasdaq-100 Index (NDX) has been up nearly 22% for the 90 days ending July 16. So it stands to reason investors’ affinity for mega-cap growth stocks increased. That rally could also be a reason to consider hedging related bets. That task is made easier with the newly minted Invesco QQQ Hedged Advantage ETF (QQHG ). The fund debuted in early May as an addition to Invesco’s Innovation Suite. It provides investors with a compelling combination of equity exposure comparable to NDX and protection.
Fortunately for novice investors and market participants new to hedging strategies, QQHG is neither complex nor exotic. In fact, the actively managed ETF’s partial protection is delivered via an options overlay. That simplicity could be a source of allure for investors looking to maintain Nasdaq-100 exposure while not having to “outsource” downside protection to another vehicle.
Understanding QQHG's Inner Workings
Interest in income-generating assets beyond bonds has increased. So, many investors perceive the intersection of ETFs and options as meaning covered call strategies. Examples of those include the Invesco QQQ Income Advantage ETF (QQA ), or those featuring whopping yields and occasionally complex options strategies.
QQHG isn’t that type of ETF, and that’s all right. Many of the covered call ETFs in the astronomical-yield category cap upside in the underlying stock, don’t offer adequate downside protection, and can subject investors to significant net asset value (NAV) erosion to get those big distributions.
Those aren’t concerns with QQHG. That’s because its primary objectives are to give leverage to some of NDX’s upside with the protection of purchased puts on that index. Puts are the options contracts that increase in value when the underlying security’s price declines. In simple terms, QQHG’s options overlay can be viewed as an insurance policy.
Gaining Downside Protection
“A good way to think about hedging is insurance. A person gets car insurance to protect against damage caused by an accident, or homeowners’ insurance to protect the value of their house in case it is damaged or destroyed. In both cases the investor is paying to protect their position,” according to Interactive Brokers.
QQHG is a convenient, cost-effective avenue for gaining downside protection. But it also taps into the benefits of hedging, some of which aren’t readily apparent to inexperienced investors.
“For starters, a hedging strategy could help you offset some of the risk of assets you consider risky to own on their own,” noted TD Ameritrade. “A hedging strategy could also help to minimize the losses suffered if the market doesn’t perform as expected or help protect gains on an investment you already hold in your portfolio. Rather than selling the investment outright, an investor might consider adding a hedge to limit any potential losses while allowing them to hold on to the position and capture any additional upside.”
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