America is now in the throes of a long-term bull market, although the good times are not without their risks. ... I believe investors should now play the U.S. market to the upside, but hedge their bets by taking a more defensive position. [One way to do that is to use] funds that hedge their downside risk. For example, there’s the PowerShares S&P 500 Downside Hedged Portfolio (PHDG).
As its name suggests, it holds the S&P 500. The twist is that this fund is based on the Veqtor Index. It’s a combination of the S&P 500 and the VIX, the Market Volatility Index of the Chicago Board Options Exchange. Effectively, this ETF remains fully invested in the S&P 500 until volatility, as measured by the VIX, starts to pick up. After that, the fund begins to leg into the VIX incrementally, offsetting some of the downside inherent in a falling market. The longer and bigger the selloff, the more exposed the fund becomes to the VIX and the less exposed it is to the S&P 500.
Keith Richards, Investor’s Digest of Canada, www.investorsdigestofcanada.com, 416- 869-1177, October 2013
