A Horrible Hedge, HDGE

by Geoff Garbacz | 01/30/2019 4:39 PM
A Horrible Hedge, HDGE
Often investors buy puts, sell calls, short shares or buy an inverse ETF to hedge any downside risk. Among these, we feel strongly the worst choice is to buy HDGE for protection. Why? Read on and you will find out and also learn about a better replacement.

First, the goal of HDGE is to make money when the market is falling apart. As an example, from the close of September 20 to the close of December 24th HDGE rose 23.21%. In the same period, the S&P 500 fell -19.78%. 

So the value add on HDGE was 3.43% over simply shorting SPY or buying an inverse SPY ETF. A better choice would have been to buy DWSH. This is a newer inverse ETF and it returned 34.48%.  So it beat the return of HDGE by 11.27%.

Since the bottom in the market on December 24th, HDGE has fallen by -16.05% through today's close. DWSH has fallen by -20.69%. Clearly, you do not want to hold DWSH when the market begins to rebound. The same can be said for HDGE. During this period, the S&P 500 rose 14.03% so both went down more than the S&P 500 rose. A failure of both products

The result illustrates inverse ETF products should be held only in periods of weakness. DWSH has been trading since July so it is harder to look back on other periods of weakness. HDGE on the other hand has a great deal of history.

Since beginning to trade in February of 2011, it has fallen by -68.96%. The S&P 500 has risen by 102%. That proves HDGE is not a buy and hold ETF. However, if we look at the last five corrective actions HDGE has lagged the inverse of the S&P 500.

We already noted that HDGE made 23.21% when the S&P 500 fell -19.78%. Other notable corrective actions saw the S&P 500 lose -10.16% from 1/26/18 to 2/8/18, -10.54% from 12/29/15 to 1/20/16 and -12.25% from 7/20/15 to 8/25/15. During these same periods, HDGE made 9.35%, 15.58% and 9.30% respectively only beating the inverse of the S&P 500 one time.

The conclusion is HDGE cannot achieve its objective of offering a decent hedge to the market. However, it appears DWSH may and as such we need to watch this closely as it builds more of a track record.

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