Back to top

Image: Bigstock

Are You Expecting More Selloff? Play Volatility ETFs

Read MoreHide Full Article

Volatility in U.S. stocks jumped to a record after global stock markets went into the tailspin again on Mar 16 despite global central banks co-ordinated efforts. Key U.S. indexes suffered the biggest rout (down more-or-less 12% each) on the day since 1987 in spite of the Fed’s adoption of crisis-era policies.

The Nasdaq’s percentage decline was the largest on record. This led the Cboe Volatility Index ended Monday at 82.69. Before this, the fear gauge's previous closing high was 80.86 on Nov 20, 2008.

If the series of recession predictions by economists and central banks’ super-dovishness were not enough to spook investors, President Trump’s latest warning that the crisis may stretch to the summer months came as a body blow for Wall Street.

Downbeat Economic & Market Forecasts

U.S. markets are officially in the bear market. Goldman Sachs predicted that the S&P 500 could slump 16% more before bottoming out and rebounding through the rest of the year. An institutional investor Rich Bernstein believes that investors are underestimating the economic fallout from the coronavirus to the economy and warned about a “full-blown profits recession” in 2020 in America. Goldman Sachs expects zero earnings growth this year.

Guggenheim Partners sees 10% to 20% probability of a global depression. Sensing the severity of the situation, J.P. Morgan recently moved away from its earlier view and has projected a coronavirus-driven recession in the United States. The bank said its views of the coronavirus outbreak "have evolved dramatically in recent weeks." JPMorgan economists now expect U.S. GDP to contract by 2% in the first quarter and 3% in the second.

Goldman Sachs warns U.S. markets will encounter a steeper decline going ahead and the U.S. GDP will contract 5% in the second quarter (read: Is the Acute ETF & Stock Selloff an 'Overreaction' or Justified?).

Thus, if you also expect further crash in the market, then bet on volatility ETFs/ETNs and earn huge bucks within short time span.

ETFs/ETNs in Focus

iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX - Free Report)  

The underlying S&P 500 VIX Short-Term Futures Index Total Return offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the Index. The product charges 89 bps in fees. The product added 332.5% past month (as of Mar 17, 2020) (see all volatility ETFs here).

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

The underlying S&P 500 VIX Short-Term Futures Index measures the movements of a combination of VIX futures and is designed to track changes in the expectation for one month in the future. The fund charges 85 bps in fees. It added about 344.9% past month.

ProShares VIX Mid-Term Futures ETF (VIXM - Free Report)

The underlying S&P 500 VIX Mid-Term Futures Index measures the movements of a combination of VIX futures and is designed to track changes in the expectation for VIX five months in the future. The fund charges 85 bps in fees. The product gained about 97% past month (read: Short Small-Cap ETFs as U.S. May Face Technical Recession).

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 >

Published in