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Volatility ETFs Spike on Evergrande Collapse Fears
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Market volatility roared back especially on fears over the potential collapse of property developer China Evergrande Group. The Chinese real estate juggernaut, which has been sitting on a huge debt of more than $300 billion, could default on its interest payment of $150 million due later this week, potentially triggering a global financial meltdown like the post Lehmann Brothers collapse.
Ongoing debates over the debt limit in Washington and a looming Federal Reserve policy meeting added to the market uncertainty. The White House warned that a failure by the U.S. Congress to extend the debt limit could push the economy into a recession and lead the country to default on its payment obligations. The U.S. House is set to vote this week on the debt ceiling.
Additionally, concerns over accelerating coronavirus infections, renewed inflation fears, signs of a slowdown in China and potential for high corporate tax rates have been playing foul on the stock market in recent weeks (read: Tax Hike Worries Drive Last Week's Inflows: 5 Hot ETFs).
Given this, the volatility level represented by the CBOE Volatility Index (VIX), also known as fear gauge, jumped as much as 32% to the highest level in more than six months on the Sep 20 trading session but was up 10% at the close. This suggests that market worries have started to set in. This fear gauge tends to outperform when markets are declining or on fear-levels pertaining to the future are high.
Investors could benefit from this trend. While they can’t directly buy 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 steadily move higher as long as trade concerns linger.
iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX - Free Report)
This is a popular option providing exposure to volatility that sees a truly impressive average volume of about 28 million shares a day. The note has amassed $981.3 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. The product gained 10.9% on the day.
It seeks to profit from an increase in the expected volatility of the S&P 500 as measured by the prices of VIX futures contracts. The ETF focuses on the S&P 500 VIX Short-Term Futures Index. It has amassed $337.8 million in AUM and charges 85 bps in fees per year. The fund trades in an average daily volume of around 3.7 million shares and surged 10.9% (read: Invest in These Hedge Volatility ETFs to Protect Your Portfolio).
Investors seeking huge gains in a very short time frame could consider this leveraged volatility ETF. This fund offers exposure to one and one-half times (1.5x) the daily performance of the S&P 500 VIX Short-Term Futures Index. It has accumulated $970.9 million and sees an average daily volume of 30.3 million shares. UVXY charges 95 bps in annual fees and jumped 16.3% on the day.
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 wherein the near-term futures are cheaper than the long-term futures contracts. As 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).
Though volatility products are seeing erratic trading, this seems a good time to add these products to your portfolio as global growth fears will threaten the stock market at least in the near term.
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Volatility ETFs Spike on Evergrande Collapse Fears
Market volatility roared back especially on fears over the potential collapse of property developer China Evergrande Group. The Chinese real estate juggernaut, which has been sitting on a huge debt of more than $300 billion, could default on its interest payment of $150 million due later this week, potentially triggering a global financial meltdown like the post Lehmann Brothers collapse.
Ongoing debates over the debt limit in Washington and a looming Federal Reserve policy meeting added to the market uncertainty. The White House warned that a failure by the U.S. Congress to extend the debt limit could push the economy into a recession and lead the country to default on its payment obligations. The U.S. House is set to vote this week on the debt ceiling.
Additionally, concerns over accelerating coronavirus infections, renewed inflation fears, signs of a slowdown in China and potential for high corporate tax rates have been playing foul on the stock market in recent weeks (read: Tax Hike Worries Drive Last Week's Inflows: 5 Hot ETFs).
Given this, the volatility level represented by the CBOE Volatility Index (VIX), also known as fear gauge, jumped as much as 32% to the highest level in more than six months on the Sep 20 trading session but was up 10% at the close. This suggests that market worries have started to set in. This fear gauge tends to outperform when markets are declining or on fear-levels pertaining to the future are high.
Investors could benefit from this trend. While they can’t directly buy 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 steadily move higher as long as trade concerns linger.
iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX - Free Report)
This is a popular option providing exposure to volatility that sees a truly impressive average volume of about 28 million shares a day. The note has amassed $981.3 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. The product gained 10.9% on the day.
ProShares VIX Short-Term Futures ETF (VIXY - Free Report)
It seeks to profit from an increase in the expected volatility of the S&P 500 as measured by the prices of VIX futures contracts. The ETF focuses on the S&P 500 VIX Short-Term Futures Index. It has amassed $337.8 million in AUM and charges 85 bps in fees per year. The fund trades in an average daily volume of around 3.7 million shares and surged 10.9% (read: Invest in These Hedge Volatility ETFs to Protect Your Portfolio).
ProShares Ultra VIX Short-Term Futures ETF (UVXY - Free Report)
Investors seeking huge gains in a very short time frame could consider this leveraged volatility ETF. This fund offers exposure to one and one-half times (1.5x) the daily performance of the S&P 500 VIX Short-Term Futures Index. It has accumulated $970.9 million and sees an average daily volume of 30.3 million shares. UVXY charges 95 bps in annual fees and jumped 16.3% on the day.
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 wherein the near-term futures are cheaper than the long-term futures contracts. As 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).
Though volatility products are seeing erratic trading, this seems a good time to add these products to your portfolio as global growth fears will threaten the stock market at least in the near term.