Alternatives to Passive Indexing | 1 of 2

Part 1: How to hedge a common stock portfolio with exchange-traded index funds

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What is the best alternative to do-it-yourself active investing?

The financial media suggests investing in passive indexes to ensure that portfolios keep pace with the market. So, what is the worst choice?

Joining the crowd and trading the shortsighted gimmicks churned out by the Wall Street fee machine is inferior to buying and holding passive index funds and actively investing in common stocks.

Nevertheless, it is typical for proponents of passive investing to overlook the reminder that indexes encompass every company in the market, sector, or industry, resulting in ownership of many low-quality enterprises alongside a few high-quality ones. Thus, rational investors limit their holdings of index exchange-traded funds (ETFs) to hedge common stocks in their portfolios, aiming to achieve alpha over time.

This two-part series explores the concept of portfolio hedging from the long side and discusses its essential role in any active, long-term investment strategy.

Part one of the series focuses on hedging a typical stock portfolio against inflation. We’ll explore the benefits of short-duration inflation-protected securities, preferably using exchange-traded funds to reduce costs and minimize risk.

Hedge a Portfolio with Passive Index ETFs