Hedged Equity ETFs Fight for Space in Crowded Toolbox

Most financial pros haven’t given the funds a try, poll finds.

Reviewed by: Lisa Barr
Edited by: Ron Day

If one quick solution to reaping returns in a bear market was available, financial advisors would jump on it.  

Sadly, that magic tool doesn’t exist. And one offering touted by some as a solution to a down market—hedged equity funds—isn’t even on most wealth professionals’ screens. 

During a recent panel for FAs to earn industry credit hosted by fintech firm TIFIN and asset manager Swan Global Investments, 76% of the more than 125 participants on the call responded to an online poll saying they have no holdings in hedged equity funds. Swan is the   

issuer of the Swan Hedged Equity U.S. Large Cap ETF (HEGD), which has $121.8 million in assets and $9.5 million in outflows this year. 

These funds work best, according to Rob Swan, the investment firm’s chief operating officer, during a bear market, typically characterized by a decline of at least 20%. He added that HEGD offers some, but not complete, downside risk mitigation during corrections, and also seeks to post good absolute returns in an up market. 

The firm launched the fund in December 2020, which year to date is up 2.63%. By comparison, the MSCI USA Large Cap Index clocked in at more than 8%. Among HEGD’s competitors and their year-to-date numbers are the top two: the Nuveen Growth Opportunities ETF (NUGO), 12%; and the JP Morgan Nasdaq Equity Premium Income ETF (JEPQ), 8.8%. Other competitors and their year-to-date percentages are the Dimensional US High Profitability ETF (DUHP), 4.1%; the JPMorgan Equity Premium Income ETF (JEPI), 2.8%; and the Amplify CWP Enhanced Dividend Income ETF (DIVO), 1.1%.  

Ken Nuttall, the chief investment officer of BlackDiamond Wealth, told etf.com in an email that he has used hedged equity funds, including buffer funds from First Trust and JPMorgan’s Hedged Equity Fund Class 1, ticker JHEQX.  

“The pros are lower volatility with lower downside; the con is capped growth on upside,” he wrote. “Many clients are worried about outcome and making sure they accomplish their goal. These can help to do that.” 

However, Nuttall appears to be in the minority among financial advisors with respect to hedged equity funds.   

While noting that he’s not an expert on hedged equity funds, financial advisor Lawrence Pon of Redwood City, California, had this to say in an email: “Since the track record is so unpredictable, I would stay away from them. I have yet to see these work for clients. Their results and performance are never as advertised.”  

He added that their cost ratios are “above average.” 

Another financial advisor, Joey Loss at Flow Financial in Jacksonville, Florida, said he doesn’t recommend them to clients.  

“Hedged equity funds tend to be quite expensive in the landscape of funds available,” Loss said in an email. “Additionally, when clients seek a financial planner and express concerns about too much risk in their portfolio, it generally means that their overall exposure to equities needs to fall relative to other, generally less-volatile options, like fixed income or cash.  

“A client’s portfolio should reflect the balance of long-term growth-seeking (equities) and short/intermediate-term cash flow needs (fixed income/cash) appropriate for their individual psychological and financial needs,” he noted. 


Follow Michelle Lodge on Twitter @lodgemich 

Michelle Lodge is a journalist who is a contributor to many sites: Fortune, Money, Time, Barron’s, Investopedia, CNBC.com and Bloomberg.com.