HELO: Could this JPMorgan Laddered Options ETF Be a Good Alternative to the 60/40 Portfolio?

How does HELO work?

HELO is essentially the ETF adaptation of the JPMorgan Hedged Equity A (JHQAX) mutual fund, featuring a more accessible format with a comparable strategy. Analyzing the mutual fund is beneficial due to its longer track record.

JHQAX primarily constructs a low-volatility equity portfolio through active management, which involves some opacity due to its discretionary nature. However, the more discernible and critical aspect of JHQAX's approach is its options overlay strategy.

This strategy involves buying puts that are 5% out of the money relative to the current price of the S&P 500, financed by selling puts that are 20% out of the money and selling calls, typically 3.5-5.5% out of the money.

This structured options approach shields the fund from losses between a 5-20% drop in the market. Losses less than 5% parallel those of the S&P 500, but the protection kicks in up to a 20% market drop, effectively offering a 15% cushion compared to the market. The fund resumes participating in losses only beyond a 20% drop.

A notable advantage of both JHQAX and its ETF counterpart, HELO

, is the stewardship of Hamilton Reiner, a seasoned portfolio manager with 15 years at JPMorgan and over 37 years in the industry, who also manages the JPMorgan Equity Premium Income ETF

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Reflecting the trend towards cost-efficiency in active ETFs, HELO offers a lower expense ratio of 0.5% compared to JHQAX's 0.83%, with the added convenience of no minimum investment beyond the price of a single share.

How has HELO performed?

Analyzing the performance of JHQAX compared to the Vanguard Balanced Index Fund Admiral Shares (VBIAX), it's evident that JHQAX has delivered on its promise of lower drawdowns and volatility while maintaining competitive returns.

From the data provided, JHQAX has a Compound Annual Growth Rate (CAGR) of 8.09%, slightly lower than VBIAX's 8.25%. Moreover, the standard deviation, a measure of volatility, is lower for JHQAX at 9.17% compared to 10.82% for VBIAX. Overall Sharpe ratio for JHQAX is also higher at 0.68 compared to 0.59 for VBIAX, indicating better risk-adjusted returns.

JHQAX's maximum drawdown was significantly less severe at -18.82% compared to VBIAX's -22.78%, demonstrating its resilience during market downturns, particularly during the COVID-19 pandemic in early 2020 and the financial upheaval of 2022.

This is indicative of the protective nature of JHQAX's laddered options strategy, which provides a mathematically guaranteed payoff profile like guardrails, unlike the protection offered by bonds which relies on their low correlation with equities.

Given these metrics and the strategic benefits of a laddered options approach that does not involve interest rate or credit risk inherent to bonds, incorporating an ETF like HELO

could be beneficial for modern investors seeking diversified alternatives.

While it might not completely replace the traditional 60/40 strategy, it presents an option for an alternative investment sleeve, suggesting an allocation of perhaps 50% equities, 30% fixed income, and 20% in alternatives like HELO for enhanced protection.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.