Yesterday was a historical day for both the United Kingdom and European Union. The British people have decided to leave the EU and now the consequences of a Brexit are in full effect. Polls over the last couple days indicated that remain would win which rallied and gave confidence to market participants. However, these investors are now in deep water.
Markets in free fall
Last night S&P futures were trading limit down, over 100 points and under 2000. Nikkei futures tumbled over 1500 points, over 10%. VIX futures were up as much as 60%, spiking to 27. The British pound went from 150 before the vote, to 133.
Loss of British sovereignty is the fundamental reason for leaving the EU, as many supporters wanted to take back control of U.K. borders in order to curb immigration. Those that wished to stay in the EU say there are severe short-term economic consequences that would make trade difficult and slow the economy. Even President Obama recently said that if there is a Brexit, the U.K. would go to the “back of the queue” in American trade deals.
So how can you profit off the Brexit? Below I show seven different ETF/ETNs to buy in anticipation of a rally or further selling
When markets are faced with uncertainty, volatility rises. The VIX is a fear gauge that measures how much fear there is in the markets at the current moment. Traders will buy VIX instruments to hedge against panic or bet on a move lower in the market. One of the most popular VIX instruments is the iPath SP 500 VIX Short-Term Futures ETN (VXX - ETF report) . This ETN provides investors with exposure to short-term VIX futures. Essentially, when the market goes down and fear increases, it will go higher.
The chart below shows VXX over the last month versus the S&P 500. As Brexit fears increased over the last month, we saw the VIX shoot higher and the market soften. Investors can expect volatility to remain firm now that the Brexit is a reality.
The Trade: If you believe the market will continue to sell buy VXX or UVXY (2x long VIX). If you believe in a rally buy SVXY (Short VIX).
Short the market
SPDR Gold Trust (GLD - ETF report) seeks to reflect the performance of gold bullion. The Trust holds gold bars and from time to time, issues Baskets in exchange for deposits of gold and distributes gold in connection with redemptions of Baskets.
In times of uncertainty gold thrives. The Brexit has created uncertainty about the euro zone economy, the stability of the EURO and would set a precedent for other countries to leave the EU.
Gold has already been very strong this year with the ECB and Bank of Japan experimenting with negative interest rates. A yes vote could push gold much higher as currency fears force traders to buy the yellow metal.
Guggenheim Currency Shares Japanese Yen ETF (FXY - ETF report) is an investment that seeks to track the Japanese Yen. Traders will buy the Yen in expectation that it will rise against the Euro, the Pound and the Dollar. Yen momentum has been a concern and a risk-off type scenario could give the currency an extra push higher as global markets head lower.
Direxion Daily Financial Bear 3x (FAZ - ETF report) is an investment that seeks daily investment results, before fees and expenses, of 300% of the inverse of the performance of the Russell 1000® Financial Services Index,
This is a good play, not only on a Brexit yes vote, but also the Feds reaction to the Brexit. Yellen has mentioned that the vote is a concern and a yes vote will most likely create turmoil that would prevent any fed rate hike until December. Low rates are killing banks, expect FAZ to head higher on the expectation on more delays on any rate hike, plus heightened fear of economic turmoil.
The Trade: Long GLD, FXY, and FAZ if trader believes more selling to come.
Long the market
Guggenheim Currency Shares British Pound Sterling (FXB - ETF report) is a currency ETF that reflects the British pound and its daily movements. The Pound has come under extreme pressure after the yes vote. A trader can capitalize if he believes the pound will recover and thinks markets will shrug off the Brexit.
iShares MSCI United Kingdom (EWU - ETF report) is an investment that seeks to track the investment results of the MSCI United Kingdom Index. The fund will at all times invest at least 90% of its assets in the securities of its underlying index and in depositary receipts representing securities in its underlying index.
Expect U.K. stocks have been hit hard and a trader will buy EU speculation on a rally.
Direxion Daily Small Cap Bull 3x(TNA - ETF report) is a way to play US stocks through the Brexit vote. Expect a large rally if there is a no vote and the best performing stocks to be the riskier or small cap stocks. TNA gives an investor triple exposure to this idea so they can profit of a big move in the Russell 2000 index.
The Trade: Long FXB, EWU, and TNA if trader believes in a relief rally.
Volatile global markets are in store this summer due to the Brexit vote. When trading these products make sure you are “trading” and not “investing”. Stay nimble and take advantage of the volatility these products create and you should have a profitable summer.
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