Back to top

Image: Bigstock

How to Play Market Volatility With ETFs

Read MoreHide Full Article

Volatility has roared especially after trade war tensions took an ugly turn, sending the broad markets into a tailspin once again. China plans to impose new tariffs in the range of 5%-10% on $75 billion worth of imported goods from the United States in two stages — on Sep 1 and Dec 15. The move came in retaliation to the earlier proposed 10% tariff on an additional $300 billion of Chinese goods by President Donald Trump to be imposed on Sep 1.

In a counterattack, Trump raised tariffs on $550 billion worth of Chinese goods. Existing 25% tariffs on $250 billion goods will increase to 30% effective Oct 1 and the planned 10% tariffs on a further $300 billion in Chinese goods will be raised to 15% on Sep 1 and then Dec 15. Trump also ordered U.S. companies to look at alternative ways to make their products in the United States and close operations in China (read: Why Should You Buy Mid-Cap ETFs).

As a result, the volatility level represented by the CBOE Volatility Index (VIX) spiked about 19% in the last trading session, suggesting 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.

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 (VXX - Free Report)

This is a popular option providing exposure to volatility that sees a truly impressive average volume of about 25.6 million shares a day. The note has amassed $896.4 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 (read: 5 International Value ETFs Enjoying High Momentum).

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 $249.6 million in AUM and charges 85 bps in fees per year. The fund trades in average daily volume of around 2.5 million shares.

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

This ETN is unpopular and illiquid with AUM of $26.3 million and average daily volume of 110,000 shares. It seeks to deliver the daily performance of the S&P 500 VIX Short-Term Futures Index, charging 89 bps in annual fees.

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 $520.4 million and average daily volume of 11.5 million shares. UVXY charges 95 bps in annual fees (read: 5 Leveraged/Inverse ETFs Up 25% Plus at Halfway Q3).

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 26 million shares and AUM of about $1.2 billion. 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 these products is pretty high, this seems to be a good time to stuff these products in your portfolio given that trade woes will persist at least in the near term.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>