HELO: JPMorgan Hedged Equity Fund In An ETF Format (NYSEARCA:HELO)

The JPMorgan Hedged Equity Laddered Overlay ETF (NYSEARCA:HELO) is an ETF version of JPMorgan’s hugely successful Hedged Equity Fund (JHEQX). It aims to improve upon the JHEQX fund by employing a discretionary laddered option strategy instead of following a fixed quarterly schedule.

Since HELO is managed by the same management team using broadly similar strategies, I believe the HELO ETF’s returns will be comparable to JHEQX. Although JHEQX’s historical returns have been modest, the fund has been able to compress volatility, thus delivering better risk adjusted returns to investors.

I rate the HELO ETF a tentative buy for conservative investors who want to be partly protected on the downside and do not mind giving up some upside returns.

Fund Overview

The JPMorgan Hedged Equity Laddered Overlay ETF aims to provide investors with exposure to a portfolio of U.S. large cap stocks with a laddered options strategy to protect downside risk from falling markets. The goal of the HELO ETF is to capture the majority of the S&P 500 Index’s returns with reduced volatility and downside.

The HELO ETF is newly launched with an inception date of September 28, 2023, so there is not a lot of operating history. However, the underlying strategy employed by the HELO ETF has been used by JP Morgan for years in its Hedged Equity mutual funds (JHEQX, JHQDX, JHQTX)

The basic strategy for the JP Morgan Hedged Equity funds is to invest in a portfolio U.S. large cap stocks, with the whole portfolio protected via a put spread collar using SPX options. Downside is reduced via a put spread that is financed by selling upside calls (Figure 1).

JP Morgan has been extremely successful with its Hedge Equity strategy, with the three aforementioned mutual funds hoovering up a combined $24 billion in assets and the HELO ETF appears to be aiming to replicate this success in the ETF space. So far, the HELO ETF has accumulated over $100 million in assets in 2 months of operation. The HELO ETF charges a 0.50% net expense ratio.

Laddered Options Partly Address JHEQX Weakness

One criticism of JP Morgan’s success is that the JHEQX has become so large that its quarterly hedging operations are now heavily anticipated by market participants and front-run (Figure 2).

The HELO ETF aims to improve upon JHEQX by employing a laddered option strategy whereby the fund holds options for multiple (normally, three) three-month periods (each period is considered a “hedge window”), staggered a month apart. The fund manager also has discretion on how much exposure to allocate to each hedge window. HELO’s laddered option strategy aims to minimize the market impact of the hedging operations by spreading it out monthly instead of on a consistent quarterly schedule.

Portfolio Holdings

The HELO ETF has 163 positions and Figure 3 shows the fund’s sector allocation. The HELO ETF’s largest sector allocations are Information Technology (29.1%), Financials (13.7%), Health Care (12.9%), Consumer Discretionary (11.7%), and Communication Services (8.1%).

Figure 4 shows the sector allocation of the SPDR S&P 500 ETF Trust (SPY) for comparison. HELO’s sector allocations are roughly similar to SPY’s, with sector weights all within 1% of SPY’s weights.

The top 10 holdings for HELO (Figure 5) and SPY (Figure 6) are almost identical, with the exception of HELO holding Mastercard as a top 10 weight while SPY holds Berkshire Hathaway.

Returns

As the HELO ETF has only been in operation for less than 2 months, there is not a lot of performance history to analyze. Instead, I believe it may be informative to analyze the performance history of JHEQX to see what level of returns can reasonably be expected for HELO.

Historically, JHEQX has delivered 3 and 5-year average annual returns of 6.4% and 7.8% respectively to October 31, 2023 (Figure 7).

While JHEQX’s absolute returns have been modest, what JPMorgan emphasizes is the low volatility of JHEQX’s returns. For example, according to the manager’s data, JHEQX has delivered 70% of the S&P 500’s returns for the past 5 years (to September 30, 2023) with just 47% of the risk (volatility), leading to a higher Sharpe Ratio (Figure 8).

Hedged Equity Gives Investors Peace Of Mind

A commonly repeated axiom of investing is that “time in the market beats timing the market”. Despite lower total returns, JHEQX’s lower volatility and drawdowns may be beneficial in the long run, as it gives investors peace of mind and allows them to hold onto their equity investments instead of panic-selling during inevitable bear markets.

Risks To Hedged Equity Strategy

However, HELO/JHEQX’s put spread collar strategy is not without risks. First, the selling of calls to fund the put spread means that during strong bull markets, HELO/JHEQX’s strategy will lag significantly. For example, during the strong bull market in 2021, JHEQX only returned 13.4% whereas the SPY ETF returned 28.6% for an upside capture of less than 50% (Figure 9).

Secondly, HELO/JHEQX’s put spread only protects the portfolio from a 5 to 20% drawdown within the “hedge window”. If markets crash like they did in the early days of the COVID pandemic, JHEQX’s NAV can still fall more than 5%. From February 21, 2020 to March 23, 2020, JHEQX’s NAV fell by 18.8% compared to a 33% decline in the SPY ETF in the same time frame (Figure 10).

Furthermore, if declines are protracted, like in 2022, HELO/JHEQX’s strategy may cumulatively lose more than 5%. At the nadir, the JHEQX NAV lost 14.4% in 2022, before a year-end recovery reduced losses (Figure 11).

Conclusion

The JPMorgan Hedged Equity Laddered Overlay ETF aims to provide investors with the majority of the S&P 500 Index’s returns while reducing volatility and downside capture.

HELO appears to be an ETF version of JPMorgan’s much heralded Hedge Equity mutual funds. However, it improves upon the JHEQX fund by employing a laddered option strategy that minimizes the potential market impact of the hedging operations.

The HELO ETF’s goal is to give investors a smoother investment experience by employing a put spread collar strategy. Historically, the JHEQX mutual funds have been able to capture 70% of the S&P 500’s returns with only 47% of the Index’s volatility for a better Sharpe Ratio. Since the HELO ETF is managed by the same investment team and employs similar strategies as the JHEQX, I expect returns will be similar as well.

The downside to the HELO ETF is it may lag significantly during strong bull markets, and it may still lose more than 5% during market crashes or prolonged bear markets.

I believe the HELO ETF may appeal to conservative investors who want to be somewhat protected from sharp market drawdowns.