Beyond Buffer & Buy-Write: The Rise of Active Hedged Equity ETFs

And thanks to active ETFs, those solutions are simply a click away.

Derivatives and options-based active ETFs have been a rising star among many allocations in recent quarters. And now, investors have another choice and style of options-focused active ETFs to generate desired results. Hedge equity ETFs have now come to the masses.

To say investors have gone ga-ga for options would be an understatement. According to investment researcher CFRA, more than 40% of the new active ETFs listed in the U.S. last year used derivatives as a central component of their investment mandates. This represents an increase from just 20% in 2014. By the end of last year, derivative-focused ETFs made up 27% of the total number by fund count.

It’s easy to understand why the focus is on options.

As we’ve said before, options and other derivative contracts are best thought of as portfolio insurance. Options of any kind include the right but not the obligation to buy or sell something at a certain price. This could consist of single stocks, ETFs, indexes, commodities, or fixed-income assets. Essentially, security contracts enable investors to transfer some or all of the risk associated with an asset to another party. And in that, they are a way to mitigate risk and potentially smooth out the ride of a portfolio.

This has become increasingly important in today’s “risk-off” and uncertain environment. It’s their smoothing ability that is key to allocations and long-term returns.

This chart from asset manager T. Rowe Price shows that the larger the drawdown, the bigger the gain needed to recover. For many investors —particularly those near or in retirement —the required returns are just insurmountable.

Source: T. Rowe Price

To that end, billions of dollars have now flooded various option-based active ETFs. Two of the most popular have been buffer ETFs, which use options contracts to create a price floor for the fund that kicks in when the market has a drawdown below this amount, and covered-call or buy-write ETFs, which use derivatives to generate steady monthly income from the option premiums written.

There is a third way investors can potentially use derivatives in their portfolios that has long been a hedge fund staple, now available in ETF form. These are so-called hedge equity ETFs.

Like buffer and buy-write funds, hedge equity strategies use options to create an absolute return. That is steady returns over various market cycles. The difference is in the how.

Hedge Equity ETFs and funds make equity investments in an index or various stocks and then employ dynamic hedging strategies, such as protective puts or collars. This provides hedging against downside losses. For example, a “put option” on Tesla (TSLA) gives an investor the right to sell shares of Tesla at the price of $330. If the stock price drops to $310, the option owner can still sell the shares at the higher level.

However, unlike buffered ETFs, these hedge equity funds often adjust their options strategies actively to align with market conditions. This creates flexibility in volatile environments. This active and dynamic hedging can help increase upside potential and further enhance downside protection.

The proof is in the pudding.

The PMV’s Hedged Equity Index has managed to capture 46% of the S&P 500’s upside, while realizing only 24% of its losses. Since 2022, when the index was created, the index’s returns have been a smoother line as well. Examining individual choices, the results have been similar. For example, both the Invesco S&P 500 Downside Hedged ETF and the JPMorgan Hedged Equity* managed to see less loss during the market swoons following Liberation Day. ¹

Now, keep in mind, while they are dynamic in their hedging, option insurance isn’t necessarily free. Investors will still have some reduced upside potential by using an actively hedged equity ETF. According to some pundits, depending on the length of the timeline, investors may be better off in a broad-based index fund.

However, for investors with shorter timelines or a genuine need to protect their nest eggs, hedged equity ETFs could be a valuable addition to their portfolios. The best part is that the active ETF movement has made these funds relatively inexpensive to own, especially when compared to mutual funds or the high “2 & 20” world of hedge funds.

The category is new, but it is growing. Many of the existing active ETFs in the hedge equity category are from prominent players within the ETF industry.

These ETFs were selected based on their low-cost exposure to hedge equity strategies that use puts, collars, and various other downside hedging techniques. They are sorted by their YTD total return, which ranges from -3.2% to 6%. They have expenses ranging from 0.29% to 0.54% and assets ranging from $93M to $3.15B. They are currently yielding between 0.6% and 2.8%.

All in all, investors continue to seek ways to mitigate volatility and minimize downside losses. Active ETFs have continued to rise to the occasion, and now, investors have another tool in their arsenal. Hedged Equity ETFs and their ability to utilize puts to deliver smoother returns could be an excellent addition for investors seeking to reduce volatility and risk in their portfolios.

With rising market volatility, hedged equity ETFs could be a strong choice for portfolios. By using puts and collars, these active ETFs can provide just enough downside protection while maintaining enough upside to make a significant difference in long-term returns.

¹ PMV Capital (July 2025). Hedged Equity Indices