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ETF Hedging

ETFs are convenient hedging instruments because a single trade delivers diversified exposure. The question is when they beat the alternatives.

Sizing the hedge

The same hedge ratio logic applies:

Hedge value=β×portfolio value\text{Hedge value} = \beta \times \text{portfolio value}

A $2m portfolio with beta 1.1 to the market needs $2.2m of short index ETF exposure. Divide by the ETF price for the share count.

For sector exposure, hedge with a sector ETF rather than a broad index. Hedging a technology book with a broad market ETF leaves you exposed to tech underperforming the market, which is often the exact risk you were trying to remove.

ETFs against futures

Both hedge equity exposure. The choice is genuine and depends on the situation.

ETFs are better when: the size is small (a futures contract may be larger than your exposure), you need a specific sector or country with no listed future, you want to avoid managing rolls, or you cannot easily post futures margin.

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