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Play Political Gridlock with These 3 Volatility ETFs

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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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