Dividends from net investment income, if any, are declared and paid either quarterly or monthly, depending on the Fund. For Funds on a quarterly dividend payment cycle, the dividend ex-date is generally the third Friday of each March, June, September and December, payable the last business day of the month. For Funds on a monthly dividend payment cycle, the dividend ex-date is generally the 15th of each month, payable the last business day of the month.
The fund distributes its net realized capital gains, if any, to shareholders annually. Prior to paying a distribution of net investment income, the fund has the ability to invest cash generated from investment income into additional securities or money market instruments.
Distributions in cash may be reinvested automatically in additional whole shares of the fund only if the broker through whom you purchased shares makes such option available. Shareholders of the fund may contact their broker to determine the availability and costs of the service and the details of participation. Brokers may require shareholders to adhere to specific procedures and timetables. If this service is available and used, dividend distributions of both income and realized gains will be automatically reinvested in additional whole shares of the fund purchased in the secondary market.Taxes on Distributions
In general, your distributions are subject to federal income tax when they are paid, whether you take them in cash or reinvest them in the Fund. Dividends paid out of the Fund’s income and net short-term gains, if any, are taxable as ordinary income. Distributions of net long-term capital gains, if any, in excess of net short-term capital losses are taxable as long-term capital gains, regardless of how long you have held the Shares. Dividends from net investment income, if any, are declared and paid quarterly. The Fund may also pay a special distribution at the end of the calendar year to comply with federal tax requirements.
Under the provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the “2003 Tax Act”), long-term capital gains tax rates have generally been reduced for individuals to a maximum of 15% for taxable years beginning before January 1, 2009. In addition, some ordinary dividends declared and paid by the Fund to individual shareholders may qualify for taxation at the lower reduced tax rates applicable to long-term capital gains, provided that holding period and other requirements are met by the Fund and the shareholder.
Distributions in excess of the Fund’s current and accumulated earnings and profits are treated as a tax-free return of capital to the extent of your basis in the Shares, and as capital gain thereafter. A distribution will reduce the Fund’s net asset value per Share and may be taxable to you as ordinary income or capital gain even though, from an investment standpoint, the distribution may constitute a return of capital.
By law, the Fund must withhold a percentage of your distributions and proceeds if you have not provided a taxpayer identification number or social security number. The backup withholding rate is currently 28%.
Ongoing Market Uncertainty
Market volatility can strike quickly and unexpectedly. History tells us that increased market fear and uncertainty typically correspond with declines in the broader market.
How to Hedge Against Market Uncertainty?
Investors can gain exposure to the fluctuations in volatility through VIX futures. Historically the correlation of VIX futures to the S&P 500® Index has been no higher than -0.75. In other words, when the S&P 500 has performed poorly, VIX futures have generally performed well. The cost of holding a constant allocation of VIX futures, however, can be significant. Ongoing roll costs can drag portfolio returns.
Rules-Based Management of VIX Futures
Dynamically allocating to VIX futures through a rules-based strategy may help mitigate roll costs while still providing a hedge against downside losses. In addition, this strategy has the potential to generate a positive return in negative equity markets.
S&P 500 Dynamic VEQTOR Index vs S&P 500 Index
Sources: Standard & Poor's and Bloomberg L.P. from Nov. 18, 2009 through Dec. 31, 2015
The idea behind PowerShares S&P 500 Downside Hedged Portfolio is simple – dynamically allocate to VIX futures depending on historical and forward-looking market volatility trends.
According to the strategy allocation rules as defined by the underlying index, the S&P 500® Dynamic VEQTOR Index (the Index), when market uncertainty rises, the fund will add to its market hedge through VIX futures. In a falling equity market, increasing allocations to VIX futures may not only hedge downside losses, but may allow for positive strategy performance in down markets. As market uncertainty falls, the fund will decrease the amount of its market hedge. Given the uncertainty in the markets, the fund is designed to maintain a degree of downside hedging via VIX futures or cash regardless of the market environment.
Lastly, the index has a built-in stop loss mechanism which seeks to allow the Fund to move to 100% cash if losses over the preceding five-day period are greater than 2%. This stop loss feature can serve as a circuit breaker to help minimize significant losses due to a sudden spike in volatility and an abrupt drop in the equity market.
Under normal circumstances the Fund maintains a minimum 2.5% exposure to VIX futures. As market uncertainty rises, the Fund can allocate as much as 40% of the portfolio to VIX futures.
Increasing Your Hedge As Market Uncertainty Rises
FOR ILLUSTRATIVE PURPOSES ONLY; Market uncertainty is defined as a combination of both historical and implied volatility.
The PowerShares S&P 500 Downside Hedged Portfolio is an actively managed exchange-traded fund (ETF) that seeks to achieve positive total returns in rising or falling markets that are not directly correlated to broad equity or fixed income market returns.
About the Fund
- Employs a quantitative, rules-based strategy that seeks to obtain returns that exceed the S&P 500 Dynamic VEQTOR Index
- Seeks to provide low correlation to the broader equity and fixed-income markets
- Will invest in a combination of equity securities in the S&P 500 Index, VIX futures contracts and cash
- Through the rules-based strategy, Fund allocations are determined by analysis of historical and implied market volatility as well as Fund performance
- Evaluated on a daily basis
- No K-1, issues 1099
- 0.39% total expense ratio
About the Index
The S&P 500 Dynamic VEQTOR Index provides investors with broad equity market exposure with an implied volatility hedge by dynamically allocating between equity, volatility and cash. The index allows investors to receive exposure to the equity and volatility of the S&P 500 Index in a dynamic framework.