In an investment landscape often characterized by unpredictable market swings, investors continually seek strategies that offer growth potential and help mitigate volatility. Fidelity Investments’ hedged equity ETF emerges as a compelling solution.
As an actively managed options-based ETF, the Fidelity Hedged Equity ETF (FHEQ ) aims to offer investors both capital appreciation and a meaningful reduction in market volatility and exposure to market drawdowns.
Under the Hood of FHEQ
The fund has two main components that help the fund as it seeks to achieve that goal, FHEQ portfolio manager Eric Granat said on the ETF Prime Podcast. The first is an equity allocation, which is disciplined and primarily systematic, seeking to identify long-term drivers of equity returns.
The S&P 500 serves as FHEQ’s universe and performance benchmark. The active ETF implements strict risk controls, including maximum security weights of 100 basis points and maximum sector weights of around 200 basis points. The fund’s objective is to achieve modest outperformance while maintaining ultra-low tracking error and annual turnover, according to Granat.
Next, there is a derivatives component to FHEQ. This component utilizes a rules-based, actively managed put option allocation to mitigate the negative impact of market volatility on the fund’s equity allocation.
FHEQ will deploy a diversified allocation of listed and exchange-traded S&P 500 index put options. The active ETF will frequently rebalance its put allocation, sometimes multiple times a week, to adapt to market conditions. Importantly, the hedge becomes more defensive as the market declines, aligning with FHEQ’s goal of increased protection during volatile periods.
Upon closer examination of this strategy, two key factors distinguish it from its category peers. FHEQ maintains a diversified allocation of at least six put options at all times, unique in both expiration date and strike price. Additionally, the fund does not sell call options to fund its long put positions. Instead, it uses cash, which avoids any unwanted upside truncation that would result from a short call position, Granat explained on the podcast.
How Fidelity’s Hedged Equity ETF Performed During Market Volatility of 2025
Many investors may wonder how FHEQ performed during the S&P 500’s nearly 20% drop from mid-February to early April. This period serves as an excellent test case for a strategy designed to offer downside protection.
The initial four months of 2025 have showcased FHEQ’s robust defensive capabilities, particularly its primary objective: mitigating the depth and duration of market drawdowns for investors.
The fund’s outright ownership of put options can provide a compelling buffer, Granat said. As the market declines, the value of these puts increases, effectively offsetting losses in both performance and experienced volatility. This attractive hedge performance can be a key differentiator for risk-sensitive investors, helping them maintain their target allocation and avoid making emotional, long-term portfolio adjustments driven by short-term market fluctuations.
For more news, information, and analysis, visit the ETF Investing Channel.
Fidelity Investments® is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Fidelity Investments, nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
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