This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

New ETFs Look to Protect Against Market Declines

NEW YORK ( TheStreet) -- Specialty ETF provider VelocityShares recently listed two exchange-traded funds that could help investors who were left nervous about the possibility of a large large market decline after the panic in late June over whether the Federal Reserve might start to "taper" its quantitative easing program.

These new ETFs are VelocityShares Volatility Hedged Large Cap ETF (SPXH) and VelocityShares Tail Risk Hedged Large Cap ETF (TRSK)

The funds offers a blend of long equity exposure (85%) and VIX index derivatives (15%) that are intended to hedge market declines.

The equity exposure comes via equal-sized positions in SPDR S&P 500 (SPY), iShares Core S&P 500 ETF (IVV) and the Vanguard S&P 500 ETF (VOO).

The difference between the two funds is how the hedges are constructed and what each fund is trying to protect investors from.

The starting point for the hedge in SPXH is to have a neutral position in volatility. Thirty-three percent of the VIX exposure will be two-times long, while 66% will be in an inverse derivative.

The starting point for the hedge in TRSK is to be 35% net long volatility within the VIX hedge portion of the fund. Both funds will rebalance the volatility exposure monthly.

The difference between the two funds, simply speaking, is that TRSK is more hedged than SPXH. When the U.S. equity market does go down a lot, TRSK should have less of a decline, or offer more protection, than SPXH. Conversely, when the US equity market is going higher, TRSK will lag further behind than SPXH will.

There is a cost to protecting a portfolio against a decline, and for these funds it should mean less participation during market rallies. VelocityShares provides data on this to enhance understanding of this point. As of April 30 of this year, the S&P 500 had a year-to-date return of 12.74% vs. a gain of 9.97% for the index underlying SPXH and a gain of 7.66% for TRSK.

These are complicated funds to understand. They also rely on the relationship between the S&P 500 and volatility remaining the same in the future. The increasing value of the volatility derivatives during market declines is where the protection comes from. It is generally accepted that when stocks go down, volatility goes up, so any unforeseen change in that dynamic could make the funds ineffective.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
SPXH $28.97 0.00%
TRSK $27.19 0.00%
AAPL $93.74 0.00%
FB $117.58 0.00%
GOOG $693.01 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs