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Leveraged Volatility ETFs in Focus on Geopolitics

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After a stupendous rally this year, the global equity market took a major hit from rising North Korea tension. This is especially true as global stocks wiped out $1 trillion last week while the fear gauge – CBOE Volatility Index (VIX) – soared 55%, the biggest weekly gain since December 2015.

Investors should note that VIX tends to outperform when markets are falling or fear levels over the future are high. Volatility flared up after Donald Trump stepped up his rhetoric on the ongoing North Korean nuclear missile standoff by saying that North Korea would face "fire and fury like the world has never seen" if it continues to threaten the U.S. North Korea reacted by threatening to launch a missile strike on Guam by mid-August (read: ETFs to Profit from US-North Korea Tensions).

A furious Trump doubled down on his aggressive stance on North Korea late last week by saying that his threat to unleash “fire and fury” on the country was not “tough enough and tweeted that "Military solutions are now fully in place, locked and loaded, should North Korea act unwisely.”

The battle of words has led to heightened volatility and uncertainty, raising fears of military war. The turmoil is expected to continue unless the exchange of harsh words stops or North Korea backs off on missile tests. Given this, investors could look into volatility products that have proven to be short-time winners in turbulent times. Notably, leveraged volatility ETFs could lead to huge gains in a very short time frame when compared to the simple products.

Below, we have highlighted two leveraged volatility ETFs for investors seeking higher returns from the uncertain market (see: all the Volatility ETFs here):

ProShares Ultra VIX Short-Term Futures ETF (UVXY - Free Report)

This product provides two times (2x or 200%) exposure to the daily performance of the S&P 500 VIX Short-Term Futures Index, which reflects implied volatility of the S&P 500 Index at various points along the volatility forward curve. It offers a daily rolling long position in the first and second months VIX futures contracts. The ETF has amassed about $343.9 million in its asset base while sees solid volume of around 10.3 million shares per day. It charges 95 bps in fees per year from investors. The fund surged nearly 45% last week.

VelocityShares Daily 2x VIX Short Term ETN

Like its ProShares counterpart, this note also offers two times exposure to the S&P 500 VIX Short-Term Futures Index. TVIX is also popular with average daily volume of more than 7 million shares and AUM of about $325.9 million. Expense ratio came in much higher at 1.65%. The note was up nearly 44.3% last week (read: Volatility Spikes on Geopolitics: 4 ETF Tactics to Shield).
 

Bottom Line

These two products have clearly outpaced the iPath S&P 500 VIX Short-Term Futures ETN (VXX - Free Report) , which tracks the same index. As such, investors could ride out near-term volatility with the above-mentioned products but should monitor the VIX futures market carefully before investing.  

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 volatility ETFs and ETNs must roll from month to month in order to avoid ‘delivery’, the situation of contango can eat away returns over long periods. Further, these products have been terrible performers over the medium and long terms.

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