Play Political Gridlock with These 3 Volatility ETFs - ETF News And Commentary
October 09 2013 - 10:01AM
Zacks
Investor concerns are growing with the U.S. government shutdown
entering the second week and the debt ceiling deadline approaching.
Markets fell sharply due to lack of any progress seen on resolving
these issues (read: The Government Shutdown Puts These 3 ETFs in
Focus).
The partial closure has resulted in hundreds of thousands of
furloughs, while a failure to raise the debt limit could turn to a
global financial crisis due to a default of U.S. Treasury
obligations. Further, the prolonged shutdown could also bring
broader economic recovery to a halt, affecting almost all the major
classes and categories, thereafter dampening consumer
confidence.
In such a backdrop, investors are racing to book their profits and
thus, selling stocks. Yet, the ongoing political chaos could result
in volatile trading days ahead until a debt ceiling agreement is
reached.
Volatility levels are best represented by the CBOE Volatility Index
(VIX). This fear gauge tends to rise when markets are sliding or
investor panic is starting to set in. The index climbed 17% since
the start of October, suggesting that risks are rising and
investors could definitely benefit from this trend.
For investors seeking to play this trend, we have highlighted three
short-term volatility ETFs that are currently doing well in the
market and are outperforming other products. When markets start
plunging, investors often consider these products for hedging
purpose for safety.
As such, these products would certainly help investors if these
trends continue in the coming days, and worries over the debt
ceiling plague escalate (see: all the Volatility ETFs here):
iPath S&P 500 VIX Short-Term Futures ETN
(VXX)
This is the most popular volatility ETN on the market, focusing on
the S&P 500 VIX Short-Term Futures Index. The Index offers
exposure to a daily rolling long position in the first and second
month VIX futures contracts.
The note has amassed nearly $1.5 billion in AUM and charges 89 bps
in fees per year from investors. The product sees a truly
impressive volume level of over 47 million shares a day. VXX added
10.3% over the past five trading sessions.
ProShares VIX Short-Term Futures ETF
(VIXY)
This fund offers investors to capitalize on the U.S. equity market
volatility one month into the future by tracking the S&P 500
VIX Short-Term Futures Index. The product has $1,707 million in AUM
and sees good average daily volume of 591,000 shares. The ETF
charges 0.85% in expense ratio.
The fund is up 10.2% in the past five days (read: 3 ETFs to Watch
in October).
VelocityShares Daily Long VIX Short-Term ETN
(VIIX)
This product also seeks to deliver the daily performance of the
S&P 500 VIX Short-Term Futures Index. The index provides
investors with exposure to one or more maturities of futures
contracts on the VIX, which reflects implied volatility of the
S&P 500 Index at various points along the volatility forward
curve.
VIIX is unpopular, having just $14 million in its asset base, and
sees low volume of 121,000 shares per day. The ETN charges 89 bps
in annual fees and added 10.15% over the past five trading sessions
(see more in the Zacks ETF Center).
Bottom Line
Investors should note that these three products are only suitable
for short-term traders. The products in the volatility space have
been terrible performers over the medium and long term (read: Why I
Hate Volatility ETFs (And Why You Should Too)).
This is because most of the time, the VIX futures market trades in
a condition known as ‘contango’, a situation where near-term
futures are cheaper than long-term futures contracts. Since the
volatility ETFs and ETNs like VXX must roll from month to month in
order to avoid ‘delivery’, the situation of contango can eat away
returns over long periods.
Still, over the next few days or weeks, these volatility products
could be solid picks. So look to these in the short term if current
trends in the market remain, and political dysfunction continues in
the U.S.
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VEL-VIX ST (VIIX): ETF Research Reports
PRO-VIX ST FUT (VIXY): ETF Research Reports
IPATH-SP5 VX ST (VXX): ETF Research Reports
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