Investing in options-based ETFs can be a powerful way to pursue capital appreciation while aiming for reduced volatility and protection against market downturns.
However, the unique nature of options may make active management particularly beneficial due to options having a finite lifespan and sensitivity to market movements. The Fidelity Hedged Equity ETF (FHEQ ) serves as a prime example of this principle in action.
FHEQ is actively managed. Fidelity designed FHEQ to offer investors both growth potential and a meaningful reduction in market volatility and exposure to drawdowns. It achieves this through two main components: an equity allocation and a diversified allocation of exchange-traded S&P 500 Index put options.
How Active Management Can Add an Edge to Options-Based ETFs
A core differentiator for FHEQ is its frequent rebalancing of the put allocation. The active ETF may rebalance put options as frequently as multiple times a week. This frequent rebalancing, made possible by the fund’s active management, helps it maintain its defensive positioning as market conditions change.
According to its design, the fund becomes more defensive as the market declines become greater. This means that when volatility spikes and market drawdowns deepen, FHEQ’s hedge grows more robust. It may seek to achieve this goal by holding more puts than its peers in the hedged equity space.
This leads to another important aspect of active management in options-based strategies, which lies in the ability to manage entry and exit points for investors. Options are not buy-and-hold investments. They must be continuously rolled and maintained. This ongoing process of adjustment is essential for providing a consistent risk experience for all investors. That’s regardless of when they buy or sell shares.
Unlike options-based ETFs that might only rebalance options quarterly or less frequently, FHEQ’s frequent adjustments aim to minimize timing risk for shareholders. This means that an investor entering or exiting the fund today can expect a risk experience very similar to someone who invested days, weeks, or even a month prior.
Ultimately, active management in options-based ETFs like FHEQ has the potential to maximize the effectiveness of the hedge. Additionally, it can potentially provide a more consistent and defensive equity experience for investors.
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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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