Invest in Equities While Mitigating Volatility With PHEQ

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Volatility continues to create churn in April markets as interest rate uncertainty rises. For investors looking to capture equity exposure with an eye to volatility, the Parametric Hedged Equity ETF (PHEQ) is worth consideration.

The CBOE S&P 500 Volatility Index (VIX) measures implied volatility expectations for the next 30 days within U.S. stocks. The VIX rises during market shocks and when investor uncertainty spikes. The VIX rose sharply in mid-April on rate fears, reaching levels not seen since October 2023.

Chart of the VIX volatility index in the last year.Chart of the VIX volatility index in the last year.

Chart of the VIX volatility index in the last year.

That said, VIX measurements below 20 generally reflect stability while levels above 30 mark enhanced market stress.

Equities rose choppily in the first quarter as investors hung their hopes on multiple rate cuts this year. Persistent inflation dashed those hopes in mid-April, causing equities to fall.

PHEQ Offers Volatility Mitigation and Upside Capture Potential

Increasing geopolitical risk and a resilient economy paint a complex picture for investors to navigate. Factor in the impact of an election year in the second half, and market volatility could prove a mainstay.

Investors looking to mitigate equity losses within their portfolios would do well to consider the Parametric hedged Equity ETF (PHEQ). The fund seeks to provide capital appreciation while protecting against losses.

While PHEQ limits upside capture, the strategy provided a much smoother ride within broad equities YTD. The ability of the fund to mitigate losses proves a boon in ongoing volatility.

Chart of PHEQ and SPY total returns YTD.Chart of PHEQ and SPY total returns YTD.

Chart of PHEQ and SPY total returns YTD.

PHEQ invests in U.S. large-cap stocks within the Solactive GBS US 500 Index while utilizing options to hedge against drawdowns. The strategy optimizes the weights of its holdings to create a risk and return profile similar to that of the Index.

It also employs a laddered options overlay strategy that sacrifices some upside potential for downside protection. PHEQ does so by utilizing a put spread collar strategy wherein it buys close to the money protective puts and sells further out of the money puts.

Any loss mitigation is limited to that which the put spread covers. The fund ladders the one-year options across quarters to allow for optimal downside protection and upside capture. The fund also writes calls, thereby earning a premium to offset the put spreads.

The fund engages in tax loss harvesting within its equity holdings to offset realized gains. It distributes a quarterly dividend and carries an expense ratio of 0.29%.

For more news, information, and analysis visit The ETF Yield Channel.



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