Hedged Equity ETFs: Options-Based Alternatives to the 60/40 Portfolio

What are put-spread collars?

A put-spread collar is a multi-leg options strategy designed to reduce downside risk while limiting upside potential. This strategy involves three options trades layered on top of an existing long position in an ETF or stock.

For example, if I own an ETF tracking the S&P 500 index, I could hedge with a put-spread collar by:

1. Buying a 5% out-of-the-money (OTM) put – This protects against losses beyond 5% by giving me the right to sell at that price.
2. Selling a 20% OTM put – This helps finance the cost of the 5% put by obligating me to buy the ETF at a much lower price if it drops more than 20%.
3. Selling a covered call – The strike price depends on how much premium I need to generate to fully offset the cost of the long put, effectively capping my upside potential.

Ideally, all three options expire on the same date, typically three months into the future. This setup buffers losses if the S&P 500 declines between 5% and 20%, while limiting gains beyond a certain level.

A put-spread collar is superior to a typical collar because buying a put outright is expensive, and a standard collar would require selling a covered call closer to at-the-money (ATM) to fully finance it, significantly capping upside.

By selling a short put, you generate additional premium to offset the cost of the long put, allowing for less restrictive upside while still hedging losses between 5- 20% in the aforementioned example.

Simplify Hedged Equity ETF

HEQT

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HEQT deploys a laddered approach to put-spread collars, meaning it staggers three separate expirations over sequential months rather than rolling the entire hedge at once.

This structure reduces timing risk, ensuring that not all positions are reset at the same time, which helps smooth performance across different market conditions.

Historically, HEQT has performed exceptionally well, earning a five-star Morningstar rating and delivering superior risk-adjusted returns compared to 149 funds in the Equity Hedged category as of February 28, 2025.

From November 2, 2021, to March 14, 2025, it has strongly outperformed a traditional 60/40 portfolio, with a compound annual growth rate (CAGR) of 7.22% vs. 3.11%, lower volatility (8.62% standard deviation vs. 11.53%), and a much smaller maximum drawdown (11.51% vs. 21.53%).

The ETF is also relatively affordable, charging a 0.44% expense ratio, though one thing to watch out for is its slightly wider 0.13% 30-day median bid-ask spread, which can add to trading costs.

JPMorgan Hedged Equity Laddered Overlay ETF

HELO

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HELO is HEQT’s main competitor, managed by Hamilton Reiner, the same portfolio manager behind the hugely successful JPMorgan Equity Premium Income ETF

HELO’s strategy mirrors that of the five-star Morningstar-rated mutual fund JPMorgan Hedged Equity I (JHEQX), employing a 5-20 put spread collar, where downside protection is financed by selling a covered call usually set 3.5% to 5.5% out of the money (OTM).

Since HELO’s track record is too short to gauge how it would have performed during 2022’s bear market, we can use JHEQX as a proxy.

From May 30, 2014, to March 14, 2025, JHEQX delivered a compound annual growth rate (CAGR) of 8.05%, slightly outperforming the 7.91% CAGR of a traditional 60/40 portfolio. It also had lower volatility (9.16% standard deviation vs. 10.74%) and a smaller maximum drawdown (18.85% vs. 22.78%), predictably producing a better risk-adjusted return, with a Sharpe ratio of 0.7 vs. 0.6.

HELO is also markedly less expensive and more accessible than JHEQX, with a 0.50% expense ratio and a $60 share price, compared to JHEQX’s 0.58% fee and its $1 million investment minimum.

This article is for informational purposes only and does not in any way constitute investment advice. The author may express their own opinions, which may not represent the opinions of ETF Central or its affiliated partners. It is essential that you seek advice from a registered financial professional prior to making any investment decisions.