Tony’s ETF Buyer’s Guide: Hedged Equity ETFs

Two Ways to Hedge Equity Risk

The first ETF under review is the Simplify Hedged Equity ETF

. Its construction is deliberately straightforward. Most of the work is done by holding the iShares Core S&P 500 ETF

IVV

-1.7%

, which provides large-cap U.S. equity exposure at a very low underlying expense ratio of 0.03%.

That choice matters. Rather than building an active stock portfolio, the strategy relies on a well-established benchmark and focuses its complexity where it is intended, in the risk management layer.

That risk management layer takes the form of a put-spread collar on the S&P 500. HEQT begins by buying a put option that is 5% out of the money. This establishes downside protection once the index falls beyond that level. To help finance the cost, the fund sells a put that is 20% out of the money. This means that losses begin to reappear once the index falls beyond that threshold.

On top of that, HEQT sells an out-of-the-money call option, which caps upside participation but generates additional premium that helps fully offset the cost of the put structure.

The payoff profile looks very different from a fully long equity position. Compared with owning the index outright, gains are muted during strong rallies, modest drawdowns are softened, and very deep selloffs reintroduce downside exposure after mitigating some initial losses.

Importantly, this is not a one-off discreet hedge that expires and disappears. HEQT ladders these collars across three sequential months and applies them to 100% of the portfolio’s notional equity exposure, which helps smooth outcomes over time.

One practical advantage relative to buffer ETFs is that dividends are not sacrificed. The fund still posts a 0.79% 30-day SEC yield, and retaining dividend participation matters for long-term total return. Costs are also reasonable for an options-based strategy, with a net expense ratio of 0.43%.

A different expression of the same broad philosophy comes from the Fidelity Hedged Equity ETF

. The first difference is on the equity side. Rather than tracking the S&P 500, FHEQ uses an actively managed stock portfolio of over 100 holdings at a 0.48% expense ratio.

The managers target a market-cap profile similar to the S&P 500 and rely on quantitative inputs for active stock selection, with the stated goal of outperforming the benchmark. That introduces manager discretion and some opacity relative to HEQT’s index-based approach.

The second difference lies in how options are used. FHEQ does not employ a collar. Instead, it holds a ladder of S&P 500 put options with varying strikes and expirations extending well into the future. These puts provide convex protection during sharp market declines, but they also create a steady cost as many of them expire worthless in calm or rising markets.

To put it simply, HEQT aims for a smoother ride with clearly defined trade-offs. Upside is capped, downside protection works within a specified range, and outcomes are relatively predictable. FHEQ accepts more ongoing drag in exchange for the possibility of stronger protection during severe selloffs. Both reduce equity risk, but with different trade-offs.

How They Fared Versus a Traditional 60-40 Portfolio

The shared performance window for these ETFs is short. The backtest covers roughly 1.81 years, from April 11, 2024, through February 2, 2026. That limits how much can be inferred, but the results so far are directionally consistent with what these strategies are designed to do.

Over this period, both ETFs outperformed the 60-40 on an absolute return basis. They also posted similar maximum drawdowns and comparable realized volatility. Where the difference shows up is in risk-adjusted performance. FHEQ recorded a Sharpe ratio of 0.93, HEQT came in at 1.03, and the 60-40 portfolio lagged at 0.72.

The gap between the two ETFs is also instructive. HEQT performed better on a risk-adjusted basis, which is not surprising given its collar structure that does better under modest to moderate volatility. FHEQ continues to experience ongoing theta drag as puts expire and new protection is purchased.

This period has not featured a sharp equity correction, so the convexity embedded in FHEQ’s option book has not had an opportunity to offset that drag. That protection is there if needed, but it has not been called upon yet. Conversely, drawdowns have also not been deep enough to breach the lower leg of HEQT’s put spread, where losses beyond roughly 20% would resume on a one-to-one basis.

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.