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Volatility ETFs Spike on Italy Chaos, Renewed Trade Fears

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Volatility returned in the market with deepening political crisis in Italy and renewed fears of U.S.-China trade wars. This is especially true as the global markets have been unnerved by Italy’s political upheaval since the prospect of new elections that might serve as a de facto referendum on the country’s membership in the euro (read: Italy ETFs Plunge on Deepening Political Chaos).

Meanwhile, Spain might also head toward a snap election, as prime minister Mariano Rajoy will face a vote of confidence on his leadership on Jun 1. All these developments could trigger of Eurozone meltdown, affecting demand for global goods and services.

Meanwhile, tensions between the United States and China have also flared up after cooling down for a week. This is because the Trump administration is looking to impose a hefty 25% tariff on $50 billion worth of Chinese goods, with a target date of Jun 15 to announce the final list of goods subject to new import taxes. Trump also plans to restrict Chinese investment in U.S. companies and limit the number of goods that US companies can sell to China. The news came within a week when both sides reached an agreement and vowed not to launch a trade war against each other (read: Sector ETFs & Stocks to Surge As US-China Trade Fear Ebbs).

The events have led to heightened volatility and uncertainty in the global stock market. As such, the volatility level represented by the CBOE Volatility Index (VIX) jumped as much as 38% to hit the highest level in more than two months at above 18. This suggests that market fears have started to set in. This fear gauge tends to outperform when markets are falling or fear levels over the future are high.

Investors could definitely benefit from this trend. While investors can’t directly buy up this index, there are several ETF/ETN options available in the market that can provide some exposure to volatility. These products have proven to be short-time winners in turbulent times.

Below, we have highlighted short-term volatility products that will continue to move higher as long as politics and geopolitics plague the global markets:

Simple Volatility ETFs

iPath S&P 500 VIX Short-Term Futures ETN (VXX - Free Report) is a popular option providing exposure to volatility that sees a truly impressive average volume of about 40.8 million shares a day. The note has amassed $798 million in AUM and charges 89 bps in fees per year. The ETN focuses on the S&P 500 VIX Short-Term Futures Index, which reflects implied volatility in the S&P 500 index at various points along the volatility forward curve. It provides investors with exposure to a daily rolling long position in the first and second months of VIX futures contracts. VXX gained 12.1% in the past trading session.

Two more products, ProShares VIX Short-Term Futures ETF (VIXY - Free Report) and VelocityShares Daily Long VIX Short-Term ETN , also track the same index. VIXY has $104.2 million in AUM and sees good average daily volume of around 2.2 million shares, while VIIX is the unpopular of the two with $8.5 million in AUM and volume of more than 154,000 shares per day. While VIXY charges 85 bps in annual fee, VIIX is just 4 bps costlier. Both products gained more than 12% in the past trading session (read: Political Drama in Europe to Push Safe Haven ETFs Higher).

Leveraged Volatility ETFs

Investors seeking huge gains in a very short time frame could consider leveraged volatility ETFs. Currently, there are two options available in this category, ProShares Ultra VIX Short-Term Futures ETF (UVXY - Free Report) and VelocityShares Daily 2x VIX Short-Term ETN . Both products provide two times (2x or 200%) exposure to the daily performance of the S&P 500 VIX Short-Term Futures Index. UVXY gained 18.2% while TVIX surged 22.2% in the last trading session.

Out of the two, UVXY is more popular with AUM of $501 million and average daily volume of about 36 million shares. Further, it charges a lower fee of 95 bps compared with 1.65% for TVIX.

Bottom Line

Investors should note that these products are suitable only for short-term traders. 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 like VXX must roll from month to month in order to avoid delivery, the situation of contango can eat away returns over long periods (see: all the Volatility ETFs here).

However, though volatility of volatility is pretty high, this seems a good time to stuff these products in your portfolio given that political issues will continue to threaten the global stock market at least in the near term.

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