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Time for Volatility ETFs With a Short-Term View?

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Volatility is often viewed as a bane for investors. Yet, during times of political and economic uncertainty, it can be a boon for those with a short-term investment view. The recent discussions around raising the U.S. debt ceiling underline this potential, turning attention towards volatility ETFs such as iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX - Free Report) .

Debt Ceiling Deadlock: A Catalyst for Volatility

The U.S. debt ceiling, currently standing at $31 trillion, is on the brink of a serious deadline. Amid tense negotiations between Republicans and President Joe Biden's administration, the path to raising the country's borrowing limit remains unclear. This political deadlock has increased market anxiety, driving volatility indices upward. For instance, iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX - Free Report) was up 2.5% on May 19 and added 0.2% after hours.

The United States is facing a crucial deadline on June 1 to avoid a potential default that could severely impact the global economy. House Speaker Kevin McCarthy called for a pause in the talks, citing the need for a candid discussion on realistic budget figures and paths forward.

President Biden, while returning from the G-7 summit in Hiroshima, criticized the GOP's stance on the negotiations as unacceptable. He urged the Republicans to move from their extreme positions. Both Biden and McCarthy spoke over the phone on Sunday, planning to meet in person on Monday afternoon. Despite the renewed discussions, the two sides remain at an impasse.

McCarthy accused Biden of shifting his proposal, causing turbulence in the talks, and further stated that there's still no agreement between the parties. The Republicans demand budget cuts in exchange for lifting the debt ceiling, while the White House argues that the nation's credit shouldn't be a subject for negotiation.

Why Invest in Volatility ETFs With a Short-Term View

During periods of political uncertainty, markets often witness increased volatility. This is where volatility ETFs, like VXX, come into play. They are designed to profit from market fluctuations, offering a hedge against market downturns and the potential for attractive short-term returns. The current U.S. debt ceiling impasse presents an excellent case for short-term investments in volatility ETFs.

It's crucial to remember that investing in volatility ETFs is typically a short-term strategy. Once the political turmoil settles and markets stabilize, these funds may experience swift downturns. Therefore, investors must stay informed about current events and be ready to shift their positions promptly.

ETFs in Focus

iPath Series B S&P 500 VIX Mid-Term Futures ETN (VXZ - Free Report) – Up 1.6% on May 19; Up 2.3% after hours

ProShares VIX Short-Term Futures ETF (VIXY - Free Report) – Up 2.7% on May 19; Up 0.14% after hours

ConvexityShares Daily 1.5x SPIKES Futures ETF – Up 3.6% on May 19

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