PHEQ ETF Seeks Capital Appreciation while Providing Downside Protection

U.S. markets look promising heading into 2024, with the S&P 500 up 23% YTD to January 5, but thereafter investors clearly saw a bit of a reversal. While large-cap stocks, entering the Q4 earnings reporting season, look strong right now, industry watchers believe we're not out of the woods yet and a potential downturn is coming.

The new forecast for the median U.S. federal funds rate for 2024 announced by the Fed on Wednesday, January 10 is 4.60% and the implied SOFR rate (forecast) for December 2024 is 3.75%, meaning that the market is expecting cumulatively nearly 100 bps of monetary easing over the Fed's forecast. We can see that the market is overly optimistic about the interest rate reversal dynamics compared to the Fed itself, and that's not a good thing for sure.

What can be done to protect the likely downside risk of 2024 investments into global stocks, apart from a hedging with SPX futures or options? One of such instruments — PHEQ — seeks capital appreciation while providing downside protection. This actively managed ETF combines a large-cap U.S. stock portfolio with an options overlay hedge. The options overlay portion of the fund is designed to reduce portfolio volatility.

PHEQ is one of five active ETFs listed by Morgan Stanley Investment Management on New York Stock Exchange Arca in October. When MSIM launched, VettaFi head of research Todd Rosenbluth called MSIM “a heavyweight with a deep heritage in active management”, so let’s welcome it too!