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PowerShares Readies ‘Downside Hedged’ ETF


In response to the growing demand for strategies that mitigate risk and volatility, Invesco PowerShares will launch a new actively managed exchange traded fund that hedges downside risk with VIX options and cash positions.

“Today, advisors and their clients are just as interested in protecting their assets as they are in generating positive returns,” Ben Fulton, Invesco PowerShares managing director of global ETFs, said in a press release.

On Dec. 6, 2012, the PowerShares S&P 500 Downside Hedged Portfolio (NYSEArca:PHDG) will begin trading. The active ETF will try to provide positive total returns in both rising and falling market conditions through a quantitative, rules-based strategy similar to the performance of the S&P 500 Dynamic VEQTOR Index. PHDG can be used to “reduce correlation, lower volatility and serve as a downside hedge in falling markets,” Fulton added.

PHDG will have an expense ratio of 0.39%.

“The PowerShares S&P 500 Downside Hedged Portfolio is among a new breed of investments in the alternative space,” Lorraine Wang, Invesco PowerShares senior vice president of new product development, said in the press release. “Unlike many alternative funds that seek to mitigate volatility by going long and short at the same time, PHDG will use a rules-based approach to dynamically shift its exposure among the S&P 500 Index, VIX futures and cash, depending on market volatility. The overall effect of the liquid alternative strategy is a portfolio with potentially below-average risk that may rise in down markets while potentially participating on the upside.”

The tail hedging strategy protects a portfolio from extreme market oscillations as a result of unpredictable, random and unexpected events, or so-called Black Swan events. The term was coined in a 2007 book by Nassim Nicholas Taleb published right before the financial crisis hit.

This “Black Swan” styled ETF will be competing with the First Trust CBOE S&P 500 VIX Tail Hedge Fund (VIXH) , which began trading on August 30. [New ‘Tail Hedge’ ETF Hunts Black Swans]

For more information on new fund products, visit our new ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.