Higher-for-longer interest rates, geopolitical friction, and a confluence of other factors are making volatility a constant companion. With that, investors are increasingly looking for ways to stay invested in equities while staying prepared for potential drawdowns. Hence, the Fidelity Hedged Equity ETF (FHEQ ) has emerged as a compelling solution.
FHEQ is an actively managed fund. It’s designed to provide exposure to the growth potential of large-cap stocks. Additionally, it offers a built-in safety net through a disciplined options strategy. Ultimately, it adds differentiated equities exposure through quantitative analysis of historical valuation, growth, profitability, and other factors to select a broadly diversified group of stocks that may have the potential to provide a higher total return than that of the S&P 500.
Equity Exposure with a Buffer
FHEQ’s core philosophy is simple: staying invested while protecting the downside. As mentioned, the fund invests the majority of its assets in large-cap equity securities similar to those in the S&P 500, but adds a strategic overlay through the systematic purchase of put options. By holding a laddered series of puts, the fund aims to mitigate the impact of market drawdowns like those witnessed in the current volatile market.
Summarily, the fund can help address the following:
- Curb emotional decision-making: Emotional decision-making during volatility could lead to rash selling at the bottom of a market. FHEQ’s defensive stance helps to smooth out the volatility ride, helping investors stay committed to long-term investment plans even during sharp market corrections.
- Mitigating tail risk: In stark contrast to hedged strategies that place a cap on protection, FHEQ’s systematic purchase of puts shields the fund through both moderate drawdowns and heavier “black swan” events. In fact, the hedge gets more protective as the market drawdown gets sharper.
- Active management alpha: Because FHEQ is actively managed, the portfolio managers use quantitative analysis to select a diversified group of stocks with the potential for outperformance relative to the S&P 500. In the end, investors get exposure to a curated list of companies with strong valuation and profitability metrics.
A Cost-Effective Solution
Famed economist Milton Friedman is known for coining the phrase: “there is no free lunch.” That said, portfolio protection isn’t free. However, at just 48 basis points, FHEQ presents a cost-effective solution. It offers upside capture while at the same time, provides downside protection.
In a raging bull market, downside protection may not be on investors’ minds. However, like insurance, one doesn’t know they need it until an unexpected event rises. In the context of financial markets, FHEQ can help provide that insurance for investors’ portfolios.
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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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