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Six Sector ETFs That Are Cheap To Hedge Now

Apr 12, 2013
David Pinsen

With these 6 sector ETFs trading near 4-year highs, downside protection is inexpensive.

On Thursday, Ron DeLegge of ETF Guide highlighted another milepost in the current cyclical bull market: two thirds of S&P 500 sector ETFs are at 4 year highs:

6 out of 9 sectors in S&P 500 now at 4-yr highs. $XLU $XLF $XLV $XLP $XLY $XLI / Laggards: Tech, energy, & materials

Ron DeLegge (@indexshow) April 12, 2013

With these sector ETFs at 4 year highs, as you might expect, their hedging costs are extremely low. For example, these were the optimal puts* to hedge 1000 shares of the Financial Select Sector SPDR ETF (XLF) against a greater-than-20% drop between Thursday and September 20th.

As you can see at the bottom of the screen capture above, the cost of this protection, as a percentage of position value, was 0.75%. To put that cost in perspective, back in October of 2011, it cost 5.39% of position value to hedge XLF against the same decline over a similar length of time.

As cheap as XLF was to hedge, the other 5 sector ETFs trading at 4 year highs were even cheaper to hedge. The table below shows the costs of hedging them against the same greater-than-20% drop over the next several months, using optimal puts. I've added SPY to the table as well, for comparison purposes.

Name

Symbol

Hedging Cost

Utilities Select Sector SPDR

XLU

0.40%

Financial Select Sector SPDR

XLF

0.75%

Health Care Select Sector SPDR

XLV

0.54%

Consumer Staples Select Sector SPDR

XLP

0.39%

Consumer Discretionary Select Sector SPDR

XLY

0.59%

Industrials Select Sector SPDR

XLI

0.57%

SPDR S&P 500

SPY

0.47%

 

 

 

 

 

 

 

 

 

 

 

 

*Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a postdoctoral fellow at Princeton University's financial engineering department to sort through and analyze all of the available puts for your stocks and ETFs, scanning for the optimal ones. The screen capture above is from the Portfolio Armor iOS App.

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