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Volatility ETFs Winning on Fiscal Cliff Turmoil

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With Barack Obama’s second term secured, investors are now zeroing in on the fiscal cliff and it appears as though they don’t like what they see. Markets fell sharply in the two days after the election results, while additional reports from Republican Congressional leaders seem to suggest that we could be in for a fight as we approach the end of the year.

With this backdrop, investors are racing to rack up their gains, selling stocks, and hunkering down for the legislative fight that is now underway. Yet, with the country’s poor fiscal health, one has to believe that at least some spending cuts and tax increases will go through meaning that there could be plenty of volatile trading days ahead as we approach the final days of 2012 (read 4 Low Volatility ETFs to Hedge Your Portfolio).

While this news hasn’t been good for many equities across the board, it has actually been quite helpful to a certain segment of the market, volatility. This corner of the investing landscape generally tracks the ‘fear index’ or the VIX, and it can benefit enormously when markets are sliding and investor panic is starting to set in (see Inside the Two ETFs up More Than 140% YTD).

Obviously this has been the case over the past few days, easily helping many traders who had purchased these products to leap higher. Still, while many of the funds in this space have been terrible from a long term perspective, their hedging abilities during market downturns is nearly unparalleled, suggesting that if these trends continue, investors should keep a close eye on any of these four outperforming volatility ETFs as the edge of the fiscal cliff approaches:

C-Tracks on Citi Volatility Index ETN - Although this product doesn’t see a great deal in volume or AUM, it has been a solid performer this week. The ETN has added double digits in the first week of November, helping to push it off of its 52 week lows.

ProShares VIX Short-Term Futures ETF (VIXY - Free Report) – For the only ETF approach in the space, this fund also tracks a short-term benchmark of volatility and has done quite well this week too. The fund is up about 5.9% this week, while its solid volume suggests tight bid ask spreads (see Leveraged ETFs and Volatility: A Powerful Mix).

VelocityShares Daily Long VIX Short-Term ETN (VIIX - Free Report) - Another ETN targeting short-term volatility, this product has little in assets but a pretty solid volume level. The note is up about 6% this week while its expenses are on the low end at 89 basis points a year.

iPath S&P 500 VIX Short-Term Futures ETN (VXX - Free Report) – Easily the most popular and well-known of the volatility products on the market, VXX has AUM over $1.7 billion and average volume above 35 million shares a day. This product sees incredibly tight bid ask spreads and is up about 5.8% over the past week.

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