HDGE is an actively managed ETF that looks to profit from bearish sentiment. Specifically, the fund establishes short positions in stocks chosen by the management team in companies that look likely to struggle. The managers look for low earnings quality or aggressive accounting (among other things) to help determine stocks that may be set to fall. Low earnings quality, as the fund’s home page notes, could include a negative forecast or downward revisions.

Active ETFs have been relatively slow to gain traction in the ETF world, with transparency being a major issue for investors. After all, it is difficult to be comfortable with an investment when you are unsure of what all it entails. HDGE sets itself apart from the competition in that regard, as the fund’s holdings can be viewed on its home page at any time, with the holdings and their respective portfolio weights updated on a daily basis.

HDGE hit the market in early 2011, so its performance has been difficult to judge. Obviously, the fund has struggled overall, as its life has existed in the span of a relentless bull market. But the fund has shown its ability to outperform in periods of brief sell-offs such as those seen in late 2011 and early 2012.

One of the biggest benefits that HDGE offers is short exposure with limited risk as the price of the ETF can only go as low at $0. A standard short position carries unlimited risk, as there is no telling how high a stock price can rise. This fund offers a variety of short positions all while limiting investor risk to a long position in a single ticker [see also How To Hedge For A Market Correction With ETFs].

For as long as markets continue to roll higher, HDGE will likely struggle to generate positive returns, as a bull trend tends to take most stocks with it. But as evidenced by its positive upturns during market sell-offs, this fund will be well poised to make big gains if and when the next market correction rears its ugly head.

HDGE would almost never be used as a core building block for a portfolio, but it certainly has a place as a hedging tool. This ETF can be used as a complementary holding to an already diversified portfolio while offering peace of mind, as it serves a protection for any drops in the market.

Still, investors need to be aware that HDGE will have trouble mustering positive returns in bullish environments, it is simply the nature of the fund. Anyone holding a long-term position in the fund can think of it almost like portfolio insurance; paying for a policy (or enduring losses in a bullish trend) can be tough, but you are always glad you have it when things go wrong.

The Ranger Equity Bear ETF is one of the most unique hedging tools available in the ETF world. As always (and especially with a fund that utilizes short positions) we encourage investors to take a close look under the hood of this fund prior to making any kind of investment.

Follow me on Twitter @JaredCummans.

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Disclosure: No positions at time of writing.