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Volatility ETFs Spike on Renewed Trade Tensions

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Volatility once again roared back following Trump’s fresh tariff threat, which escalated the trade tariff spat between the United States and China. Trump intends to increase tariff to 25% from 10% on Chinese goods worth $200 billion as soon as this week and threatened 25% tariff on further $325 billion of Chinese goods "shortly."  

This has resulted in a tailspin for the U.S. stock market. In fact, Wall Street saw the worst day in several months on May 7, declining nearly 2%. The Dow Jones Industrial Average registered its worst day since Jan 3 while the S&P 500 and Nasdaq Composite Index marked the worst day since Mar 22 (read: Beat Renewed Trade Tensions With These ETFs).

Meanwhile, the volatility level represented by the CBOE Volatility Index (VIX) spiked about 26% on May 8, the highest level in just over four months. This suggests that market worries have started to set in. This fear gauge tends to outperform when markets are declining or fear-levels pertaining to the future are high. With the latest increase, the fear gauge is on track for its biggest monthly gain, rising 61% so far this month, since 75% surge in October.

Investors could definitely benefit from this trend. While they cannot 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:

Simple Volatility ETFs

iPath Series B S&P 500 VIX Short-Term Futures ETN


This note is linked to the performance of the S&P 500 VIX Short-Term Futures Index Total Return, which renders access to equity market volatility through CBOE Volatility Index futures. The index offers exposure to a daily rolling long position in the first and second-month VIX futures contracts and reflects market participants’ views of the VIX index’s future direction at the time of expiration of the VIX futures contracts comprising the index. The note has amassed $898.1 million in AUM and charges 89 bps in fees each year. It rose 3.8% on May 7 (read: Profit From These ETFs if Market Turmoil Heightens).

ProShares VIX Short-Term Futures ETF (VIXY - Free Report)

It seeks to profit from increases 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, measuring the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration. It has amassed $263.8 million in AUM and charges 85 bps in fees per year. The fund trades in average daily volume of more than 1.8 million shares and gained 17% on May 7.

VelocityShares Daily Long VIX Short-Term ETN (VIIX - Free Report)

This ETN is unpopular and illiquid with AUM of $47 million and average daily volume of 112,000 shares. It seeks to deliver the daily performance of the S&P 500 VIX Short-Term Futures Index, charging 89 bps in annual fees. VIIX was up 16.4% on the last trading day (read: ETFs vs. ETNs: Why You Need to Know the Difference).

Leveraged Volatility ETFs

Investors seeking huge gains in a very short time frame could consider leveraged volatility ETFs. Currently, there are two options available under this category:

ProShares Ultra VIX Short-Term Futures ETF (UVXY - Free Report)

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 $700.4 million and average daily volume of 8.6 million shares. UVXY charges 95 bps in annual fees and rallied 25% in the last trading session.

VelocityShares Daily 2x VIX Short-Term ETN (TVIX - Free Report)

This note offers two times exposure to the S&P 500 VIX Short-Term Futures Index. TVIX is popular with average daily volume of around 16.9 million shares and AUM of about $982.9 million. Expense ratio is much higher at 1.65%.

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. Since 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 of volatility products is pretty high, this seems a good time to stuff these products in your portfolio given that global slowdown woes will persist at least in the near term.

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