- Despite being active investors, Wall Street gurus — not otherwise selling fee and commissioned based investment products — frequently recommend passive indexing to retail investors.
- Nonetheless, their apparently noble concern for the main street investor guarantees little more than average returns.
- At Main Street Value Investor, we prefer the hedging capabilities of index exchange-traded funds as opposed to their market correlated investment returns.
- Here is why we choose the Vanguard S&P 500 ETF as a hedge for our common stock holdings regardless of market cap size.
The Wall Street elite often advocate index investing — via mutual funds or exchange-traded funds [ETFs] — as the best overall strategy for retail investors.
At Main Street Value Investor, we agree that indexing may be appropriate for passive investors with little interest in self-directed, active investing or limited trust in the fee and commission-focused money manager alternative.
However, for self-directed investors, indexing guarantees one thing: that our portfolio performance will be average to the market, at best. Being this is Seeking Alpha and not MONEY magazine, we wanted to illustrate how using index ETFs to hedge an active portfolio strategy — as opposed to using it as an outright investment — may be the best route in the quest for total return from capital gains and dividends.
In the first of our series on ETF index hedging, we offer research on our favorite vehicle: the Vanguard S&P 500 ETF (VOO). But first, let's dive into the general concept of portfolio hedging and why it is essential to any long-term portfolio strategy.