Thanks to recent Congressional testimony by Ben Bernanke and the release of the latest Fed minutes, some are wondering if the central bank will begin to taper off asset purchases sooner rather than later. In fact, some are predicting that the cut in bond buying will hit before the year is out, suggesting that the high water mark of the Fed’s balance sheet may have been reached.
This speculation spooked the markets across the board and sent many investors looking for alternatives in order to protect against a slump. While volatility ETNs like VXX are definitely a popular choice in this type of environment, these can face significant issues over long time periods when the futures curve isn’t favorable (read Why I Hate Volatility ETFs).
Meanwhile, precious metals have been extremely weak, as speculation over a smaller Fed balance sheet was viewed as good news for the greenback and thus a negative for commodities across the spectrum.
Additionally, the other traditional safe haven—treasury bonds—were also weak on the Fed news, leaving investors with few options in order to hedge their portfolios. Fortunately though, there is one solid option that did quite well in the session, the Ranger Equity Bear ETF (HDGE - ETF report).
A Better Hedge in Today’s Environment?
This bear ETF has been beaten down so far in 2013, but it has a stellar performance after the talk of the taper in the amount of bond purchases, as it added over 3.3% on the day. Plus, it has outperformed other popular hedge plays like (GLD - ETF report) over longer time frames, suggesting that this could be a better play for investors seeking an inversely correlated choice in today’s market (see 3 Hedge Fund ETFs for Uncorrelated Returns).
How HDGE Does It
HDGE takes short positions in a number of U.S. listed companies, utilizing a bottom-up, fundamental, research driven process. In particular, the managers of this active fund will look to go short in firms with low earnings quality or aggressive accounting practices, as these may be masking deteriorating operations.
Additionally, the managers will look to identify earnings driven events that could be a catalyst for price declines. These include downward earnings revisions and reduced guidance, two factors which can signal trouble ahead for a company.
Downsides of HDGE
While HDGE is surprisingly liquid and well traded, the product is a bit pricey when compared to other hedging products. Management fees come in at 1.5%, while a number of other costs—like short interest expense, other, and acquired fund fees—result in a net expense ratio of 3.3%.
This is obviously a pretty steep annual cost, especially when compared to other products in the market that may provide investors with a similar return profile. However, as we saw following the speculation of lower bond purchases, this may be the best positioned product for the coming months in terms of hedging out some risks (also read AdvisorShares Launches New Active Equity Hedge ETF).
HDGE is a pretty innovative product that looks to give investors short exposure to the U.S. equity market. The focus on companies with weak earnings suggests that it is zeroing in on firms that are probably the most susceptible to sluggish market conditions, and thus could be due to fall in bear markets or when the bull loses steam.
You will have to pay for this cost though, as fees in this product are far higher than in other ETFs that look to provide inversely correlated exposure. However, volume is pretty good in this fund, so total costs will not be too much higher than the stated expense ratio (also read The Truth about Low Volume ETFs).
So, if you can get beyond the relatively high expense ratio, you might have a great hedging choice in HDGE. The fund seems like a great option for when markets are stumbling, and it looks to be a more direct hedge than what investors see in other products—like volatility or gold—in the weeks and months ahead.
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