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Hedging Against Market Uncertainty When You Need It Most

 

In today's market environment, downside protection continues to be a primary focus for investors. The challenge, however, is to both generate positive returns and reduce downside risk. The PowerShares S&P 500 Downside Hedged Portfolio® (PHDG) seeks to be a solution to this challenge.

PHDG provides investors with broad equity market exposure with an implied volatility hedge by dynamically allocating between equity, volatility and cash.

 
   

S&P 500 Downside Hedged Portfolio (PHDG)

   

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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, 2012

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 index strategy designed to provide returns corresponding to the performance of 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 index it tracks, 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.

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.

There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply.

The Chicago Board Options Exchange (CBOE) can make methodological changes to the calculation of the VIX Index that could affect the value of the futures contracts on the VIX Index and may affect the value of your investment.

The contracts included in the VIX Index historically have traded in "contango" markets, resulting in a roll cost, which could adversely affect the value of the Shares. At any given time, the percentage increase in the amount of VIX Index Related Instruments in which the Fund invests may be less than the percentage increase in the VIX Index.

The Fund may engage in investment transactions, or enter into futures contracts. Because futures contracts project price levels in the future, market circumstances may cause a discrepancy between the price of a stock index future and the movement in the underlying index. In the event of adverse price movements, the Fund would be required to make daily cash payments to maintain its required margin.

The Fund's use of derivatives may increase the amount of risk associated with the Fund and may magnify changes in the Fund's value positively and negatively. The use of this fund may not be suitable for all investors.

ETNs are short-term investments and if leveraged may have amplified losses or gains. ETNs do not provide principal protection and may or may not make periodic coupon payments. ETNs are subject to credit risk and the value of the ETN may drop due to a downgrade in the issuer's credit rating, despite the underlying market benchmark or strategy remaining unchanged.

The Fund is considered non-diversified and may be subject to greater risks than a diversified fund.

The Fund will gain most of its exposure to the futures markets by entering into VIX Index futures. The Fund intends to restrict its income from VIX Index futures that do not generate qualifying income, to a maximum of 10% of its gross income. However, there is no guarantee the Fund will be successful in doing so, and failure to comply with this restriction would have significant negative consequences to Fund shareholders.

The Fund currently intends to effect creations and redemptions principally for cash, rather than principally in-kind because of the nature of the Fund's investments. As such, investments in the Fund may be less tax efficient than investments in ETFs that create and redeem in-kind.

Note: Not all products available through all firms

The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market.The VIX Index is a theoretical calculation and cannot be traded. The VIX Index measures the 30-day forward volatility of the S&P 500 Index as calculated based on the prices of certain put and call options on the S&P 500 Index.

S&P® is a registered trademark of Standard & Poor's Financial Services LLC (S&P) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones). These trademarks have been licensed for use by S&P Dow Jones Indices LLC. S&P® and Standard & Poor's® are trademarks of S&P and Dow Jones® is a trademark of Dow Jones. These trademarks have been sublicensed for certain purposes by Invesco PowerShares Capital Management LLC (Invesco PowerShares). The Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Invesco PowerShares. The Fund is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates and neither S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates make any representation regarding the advisability of investing in such product(s).

An investor should consider the Fund's investment objective, risks, charges and expenses carefully before investing. The prospectus contains this and other information about the Fund. For this and more complete information about the Fund call 800 983 0903 or visit invescopowershares.com for a prospectus. Please read the prospectus carefully before investing.