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Volatility ETFs Jump on Fresh Trade Tensions & Growth Worries

Sanghamitra Saha

The July upsurge in the key U.S. indexes wavered to start August as stocks slipped mainly on renewed U.S.-China trade tension. Also, the Fed’s less-hawkish guidance on monetary policy released at July-end triggered a broader market rout to start August (read: Fed & Trade Trigger Market Bloodbath: 6 Hot Inverse ETF Areas).

Investors should note that Trump announced plans to levy a 10% tariff on $300 billion of Chinese imports that aren’t subject to U.S. duties yet. The new tariff will be put into effect on Sep 1. Another $250 billion of Chinese goods are subject to a 25% U.S. tariff. Trump also indicated that the new round of tariffs might rise beyond 25%.

Beijing has so far retaliated with tariffs on $110 billion of American goods, including agricultural products. But as a retaliatory move to the new round of tariffs (as deemed by the market watchers), China devalued its currency to an 11-year low on Aug 5 and stopped purchases of U.S. farm products. Post China’s action, stocks experienced the worst day of this year on Aug 5 (read: 6 Defensive ETFs to Beat an Edgy Market in August).

Since then, many global investment firms and market watchers have been flagging concerns about the global economic recession. Morgan Stanley sees the global economy slipping to a recession in the next nine months. Global central banks have jumped into actions like sharp rate cuts amid fears of a slowdown. In such a situation, volatility crept up in the market and put the following ETFs in focus (read: Play Global Bond ETFs to Join Central Banks' Rate Cut Euphoria).

Regular Volatility ETFs

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

The product is a popular option in the space. 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 on the future direction of the VIX Index at the time of expiration of the VIX futures contracts comprising the index. The product rose 32.3% in the past 10 days (as of Aug 12, 2019).

ProShares VIX Short-Term Futures ETF VIXY

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 gained 32.5% in the past 10 days.

VelocityShares VIX Short-Term ETN VIIX

The underlying S&P 500 VIX Short-Term Futures index seeks to provide investors with exposure to one or more maturities of futures contracts on the VIX, which reflects implied volatility of the S&P 500 Index at various points along the volatility forward curve. The product, which charges 89 bps in fees, added 32.3% in the past 10 days.

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

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. UVXY, which charges 95 bps in annual fees, rallied 49.6% in the last trading session.

VelocityShares Daily 2x VIX Short-Term ETN TVIX

This note offers two times exposure to the S&P 500 VIX Short-Term Futures Index. Expense ratio came in much higher at 1.65%.

Caveats

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).

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iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): ETF Research Reports
 
ProShares Ultra VIX Short-Term Futures ETF (UVXY): ETF Research Reports
 
VelocityShares Daily 2x VIX Short Term ETN (TVIX): ETF Research Reports
 
VelocityShares VIX Short Term ETN (VIIX): ETF Research Reports
 
ProShares VIX Short-Term Futures ETF (VIXY): ETF Research Reports
 
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