Two hedged ETFs that retirees can use for relative safety in a bear market

Quick Read

• 2022 showed that stocks and bonds can fall together. Rising rates and inflation can break traditional diversification, leaving 60/40 portfolios exposed.

• These ETFs use options to hedge downside risk. HEQT and HELO implement put spread collars to limit losses, but cap upside in return.

• Protection comes with trade-offs. Higher fees, lower income, and limited upside mean these are tools for risk management, not return maximization.

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A quick reminder for anyone who’s already forgotten about 2022: that year, the classic 60/40 balanced portfolio of stocks and bonds didn’t provide much protection. In fact, it lost nearly as much as a 100% equity portfolio.

Inflation surged well above the long-term 2% target, and to bring it down, the Federal Reserve hiked interest rates to over 5%. As a result, stocks and bonds became positively correlated. And since stocks were falling, bonds fell too. That left investors with very few places to hide and very little to rebalance into.

If that scenario repeats, there are a couple of ways to address it. One is to increase your allocation to cash, which reduces duration and interest rate sensitivity. The other is to look at alternative ETFs that explicitly hedge downside risk using options.

These strategies can help smooth returns in a bear market, but they’re not a free lunch. They tend to be more expensive, and they usually cap some upside in exchange for protection. So it’s important to approach them with a healthy dose of skepticism.

Simplify Hedged Equity ETF

The first ETF to consider is the Simplify Hedged Equity ETF (NYSEMKT: HEQT). At its core, this fund holds exposure to the S&P 500 through an underlying iShares ETF.

What makes it different is the addition of a put spread collar. This is implemented in three steps.

1. First, the fund buys a put option that’s about 5% out of the money. This establishes a layer of downside protection.

2. Second, to help fund that cost, it sells a deeper out-of-the-money put, typically around 20% below current levels.

3. Third, it sells a covered call. The strike varies depending on market conditions, but this is what fully funds the structure.

HEQT ladders these collars across three different monthly expirations. That reduces timing risk and avoids having all the hedges reset at once. You get partial downside protection, but your upside is capped and you re-enter downside risk beyond roughly a 20% decline.

The expense ratio is 0.43%, and unlike most buffer ETFs, you still receive dividends, currently reflected in a 0.81% 30-day SEC yield.

JPMorgan Hedged Equity Laddered Overlay ETF

A comparable option is the JPMorgan Hedged Equity Laddered Overlay ETF (NYSEMKT: HELO). This is essentially an ETF version of one of JPMorgan’s long-standing mutual fund strategies.

Instead of directly tracking the S&P 500, HELO holds a portfolio of actively selected large-cap U.S. stocks, though there’s still significant overlap with the index.

On top of that sits a similar options overlay. The fund buys a 5% out-of-the-money S&P 500 put, sells a 20% out-of-the-money put, and sells covered calls typically in the 3.5% to 5.5% out-of-the-money range.

The structure is reset on a rolling basis. HELO refreshes one-third of its options each month, maintaining a continuous three-month hedge ladder. That creates a more “evergreen” form of protection compared to strategies that reset all at once.

The cost is slightly higher at a 0.50% expense ratio, and the income component is lower, with a 0.63% 30-day SEC yield.

How to Use these ETFs

HELO and HEQT aren’t meant to replace a traditional 60/40 portfolio entirely. Stocks and bonds still serve a core, low-cost role for long-term growth and income. But what these strategies can do is complement that mix. Think of them as diversifying your diversifiers.

By carving out a portion of your portfolio and allocating it to one or both of these hedged ETFs, you’re adding a layer of protection that doesn’t rely on bonds behaving the way they’re “supposed” to. In environments where traditional diversification breaks down, that added flexibility can make a difference.

That said, they shouldn’t be your only source of protection. Tools like Treasury bill ladders, certificates of deposit, or even annuities can also play a role in a retirement income plan. And if you’re unsure how to balance these pieces, it may be worth speaking with a financial advisor to see what fits your situation.

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