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Profit from the Trump Bump with Volatility ETFs

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The global stock market had a good start in 2017. However, President Donald Trump’s policies increased volatility for the second week in a row after he took office on January 20. This is especially true as number of his policies like immigration curbs and travel restrictions as well as hostility toward Mexico sparked concerns over global trade, economic growth and political stability.

On Friday, Trump signed an executive order to suspend entry into the U.S. and blocked visas of citizens from seven Muslim-dominated nations - Iraq, Syria, Iran, Sudan, Libya, Somalia and Yemen - for 90 days. The move triggered widespread protests and will negatively impact sports and travel.

Last week, Trump announced plans to build a wall along the U.S. southern border to keep Mexican immigrants away and wants Mexico to pay for it. Additionally, the President is considering imposing a 20% border tax on imports from Mexico that could help in building a US-Mexico wall. This could deepen the crisis between the two neighbors and result in a trade war (read: Welcome Trump Era with These ETFs).

Given this, the volatility level represented by the CBOE Volatility Index (VIX) surged as much as 22% on Monday. It marks the biggest one-day gain since early September and suggests rising market worries. This fear gauge measures investors’ perception of the market’s risk and tends to rise when markets are sliding or investor panic starts to set in. It is constructed using implied volatilities of the S&P 500 index options, taking both calls and puts into account.

As risks are rising, 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 Trump’s anti-trade policies plague the global markets (read: Will Trump's New Policies Hurt These Sector ETFs & Stocks?):

Simple Volatility ETFs

iPath S&P 500 VIX Short-Term Futures ETN (VXX - Free Report) – a popular ETN option providing exposure to volatility – sees truly impressive volume of about 36.4 million shares a day. The note has amassed $999.1 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 month of VIX futures contracts. VXX gained 2.8% in the past trading session (read: Best and Worst ETFs to Start 2017).

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 $174.1 million in AUM and sees good average daily volume of around 2.8 million shares while VIIX is the unpopular of the two with just $10.3 million in its asset base and good volume of more than 414,000 shares per day. While VIXY charges 85 bps in annual fee, VIIX is just 3 bps costlier. Both products gained nearly 3% on the day.

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. Both gained over 5% on the day (read: Volatility ETFs in Focus as Trump Rally Fizzles Out).

Out of the two, UVXY is more popular with AUM of $515.4 million and average daily volume of about 8 million shares. Further, it charges 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 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 (see: all the Volatility ETFs here).

However, though ‘volatility of volatility’ is pretty high, this seems a good time to remain invested in this market.

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