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