What Are Hedging Strategies?

What are hedging strategies?

Video Transcript:

Hey, this is Anne, from Magnifi, and today I'm going to talk about hedging strategies.

So a hedging strategy is sort of like insurance for your portfolio. It's there to protect you if the market goes down. So I'm going to run a search for hedged equities. And what we're going to see here is we have some ETFs that actually have long positions and short positions. And a short position just means that when the value of the asset goes down, the investor actually profits. And usually a short position is something like an option. And we'll see that here in this first result. In the portfolio summary, we're seeing this is invested in large cap companies as well as options.

And I thought a cool way to demonstrate this would be to compare two ETFs that actually track the same benchmark, but one follows a hedged strategy and one doesn't. So I've already put in SPY into my comparison tool, and that's an ETF that tracks the S&P 500. And I'm also going to add in this S&P 500 downside hedged ETF. So I'm just going to click the compare button, put it into my compare tool. And then let's compare these two ETFs during a time period where we know the market went down.

So the first thing I thought of was early 2020, right when the coronavirus started, the markets had a crash. So I'm going to start with that January, 2020 period and click the end date as April of 2020. And let's see how these two funds performed against each other during that time period. So using the comparison tool, we see that during that time period, the downside hedge fund actually had positive returns, so 7.36% returns, when the S&P 500, this SPY ETF, that tracks S&P 500, actually fell by almost 10%. So this hedge ETF was actually doing what it was supposed to do, putting that insurance policy into your portfolio and giving you returns that are positive when the market as a whole went down.