PHDG: Stocks, VIX, Active Management, and Indexing In One ETF

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Analysis/Opinion: This marketing literature appears to leave a lot to the imagination.  Historically, every ETF has been either passively indexed or actively managed.  The primary marketing literature does not provide any explanation of how PowerShares S&P 500 Downside Hedged Portfolio (NYSEARCA:PHDG) accomplishes the feat of being actively managed while tracking an index.  Only by digging in the prospectus, which most investors are loath to do, does one learn that “the fund will be actively managed and can have a higher or lower exposure to any component within the Benchmark at any time and also may invest in securities not included in the Benchmark.”  Examples of securities outside the Benchmark include VIX ETFs, VIX ETNs, and E-mini S&P 500 futures.

The rules based methodology of the underlying index is also not described, but one of my previous articles provides an overview of the S&P 500 Dynamic VEQTOR Index.  PowerShares S&P 500 Downside Hedged Portfolio (NYSEARCA:PHDG) is not the first product to track this index.  That honor goes to Barclays ETN S&P VEQTOR (NYSEARCA:VQT), which was launched in September 2010 with a 0.95% investor fee.

PHDG’s advantages include a lower expense ratio and an ETF structure versus the credit risk that is inherent in the ETN structure used by VQT.  However, Barclays ETN S&P VEQTOR (NYSEARCA:VQT) has the advantage of having no tracking error and a two-year track record.  Both products will be included in the Alternative Strategies category of the ETF Field Guide.

This article was originally written by Ron Rowland, and posted on InvestWithAnEdge.

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