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
TheStreet Open House

How to Lower the Volatility of Your ETF Portfolio

Stock quotes in this article: SPLV, USMV, PHDG, VQT, SPY, SH

One of the drawbacks to a strategy such as PHDG is that it will underperform in a strong equity uptrend as we have experienced in 2013.

If you look at a year-to-date chart of the fund compared to the SPDR S&P 500 ETF (SPY) you will see that the hedged portfolio has only been able to produce about half the total gains that SPY has achieved.

One thing to note is that the volatility component clearly worked to the advantage of PHDG in the May-June timeframe where the price trend smoothed out. This is an indication that the hedging strategy does have some merit in a down market.

The main competitor to PHDG in the marketplace is Barclays S&P 500 Dynamic VEQTOR ETN (VQT). VQT is structured as an exchange-traded note, which is a debt instrument that is backed by the credit faith of the underlying bank.

One of the advantages of PHDG over VQT is the difference in expense ratio, with the PowerShares product coming in at a slim 0.39% compared to its heavier 0.95% Barclays opponent.

As of today, PHDG has only accumulated $66 million in total assets but I would not be surprised to see that number climb if stocks turn south. This ETF will likely see strong inflows in the event of a sustained correction or bear market similar to asset flows into a traditional inverse fund, such as the ProShares Short S&P 500 ETF (SH).

I will be watching this fund closely to see how the managers shift its asset allocation in response to changing market conditions. It remains to be seen how tightly the fund can track its underlying index as well as hold true to its objective of delivering non-correlated returns for its investors.

Still, I believe that this ETF should be on your watch list and can be included as a special situation position if we see a change in momentum over the next several months.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

David Fabian is currently a Managing Partner at Fabian Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing actively managed growth and income portfolios using ETFs. David regularly contributes his views on wealth management in his company blog, podcasts, and special reports. Visit www.FabianCM.com to learn more.

2 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

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
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, 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
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,042.90 -28.32 -0.17%
S&P 500 1,972.29 -5.51 -0.28%
NASDAQ 4,493.39 -12.4620 -0.28%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs