Back to top

Image: Bigstock

Volatility ETFs Jump as COVID-19 Spreads

Read MoreHide Full Article

The coronavirus outbreak — officially named as COVID-19 — has been affecting the stock market over the past few weeks and led to a broad market sell-off on Feb 24 with increase in the number of confirmed cases outside China (read: Looking to Buy the Dip? Play These Top-Ranked ETFs).  

There are now 79,407 cases of COVID-19 in 30 countries and 2,622 related deaths, per the World Health Organization. Per the latest report, the coronavirus cases in South Korea surged past 800 while it topped 200 in Italy, including five deaths. Iran said there had been 12 deaths and 61 confirmed cases in the country. China reported 409 new cases, raising the mainland’s total to 77,150. The 150 new deaths from the illness raised China’s total to 2,592.

The spike in number of cases has renewed fears that the outbreak would turn into a pandemic resulting in market volatility. The volatility level represented by the CBOE Volatility Index (VIX) jumped more than 46% to above 25 — its biggest jump since the February 2018 “Volmageddon” meltdown. This suggests that the 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 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 (read: ETFs vs. ETNs: Why You Need to Know the Difference).

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 truly impressive average volume of about 38 million shares a day. The note has amassed $1.1 billion in AUM and charges 89 basis points (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 18.6% on the day (read: Top and Flop ETFs of Last Week).

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

It seeks to profit from 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 $315.9 million in AUM and charges 85 bps in fees per year. The fund trades in average daily volume of around 3.2 million shares and was up 18.3% on Feb 24.

VelocityShares Daily Long VIX Short-Term ETN

This ETN is unpopular and illiquid with AUM of $21.9 million and average daily volume of 27,000 shares. It seeks to deliver the daily performance of the S&P 500 VIX Short-Term Futures Index, charging 89 bps in annual fees. The note jumped 18.3% 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 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 $492.3 million and average daily volume of 16.2 million shares. UVXY charges 95 bps in annual fees and jumped 27.7% on the day.

VelocityShares Daily 2x VIX Short-Term ETN

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 6.2 million shares and AUM of about $768.8 million. Expense ratio is much higher at 1.65%. TVIX was up nearly 37% on Feb 24.

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 of volatility products is pretty high, this seems a good time to add these products to your portfolio as virus fears will threaten the stock market 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 >>