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VelocityShares Daily 2x VIX Sho (TVIX) Message Board

  • baxterjames120 baxterjames120 Dec 28, 2012 3:15 PM Flag

    should you bet on the fear index?

    With market volatility once again rearing its ugly head, some advisers and market pros are once again betting on fear.

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    After around six months of relative calm, the Chicago Board Options Exchange Market Volatility Index—better known as the VIX or “fear index”—spiked above 20 on Thursday. While that is far below the 43 reached during the market correction of August 2011, or 80 hit during the headiest days of the 2008 financial crisis, market pros say the move could point to a market correction ahead, since a higher VIX has often preceded a market dip. On Friday, the index was hovering around 20.

    Not surprisingly, perhaps, those experts say traders and investors are jumpy about the fiscal cliff—the range of tax and budgetary measures that are due to expire at the end of the year should an agreement not be reached between the Republican-controlled House of Representatives, the Democrat-led Senate and the White House. If those measures are allowed to elapse, some analysts say, the U.S. economy could be pushed back into a recession. “Investors don’t know what will happen with the fiscal cliff, and uncertainty breeds volatility,” says Charles Sizemore, a financial adviser in Dallas, Texas.

    What’s more, even if the fiscal cliff is averted, most economists forecast tepid economic growth of around 2% for 2013, much the same as this year.

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    For some investors, a return to volatility presents an opportunity—albeit a risky one. There are now at least 16 exchange-traded funds or notes that track the VIX. The oldest one was launched in 2009. Assets in the group now total $2.46 billion, according Morningstar.

    Short-term returns for some of these funds have been strong. The largest of the VIX trackers, the $1.1 billion iPath S&P VIX Short-Term Futures ETN VXX +3.65% , is up 11% over the last month. The $151 million ProShares VIX Short-Term Futures ETF VIXY +3.49% and the $11 million VelocityShares Long VIX Short-Term ETN VIIX +3.45% also each gained 11% during that time period.

    The VIX calculates how turbulent investors expect the market to be, based on the prices of options contracts. The VIX itself has no intrinsic value—investors’ fears are essentially the asset. (The more stock prices are expected to swing up or down, the more pricey options contracts become.) Read more here about how the VIX works.

    Experts warn that because of that design, it’s very difficult to make long-term gains betting on volatility. Winners are often active traders making bets day to day. Indeed, the most popular fund, the iPath S&P VIX Short-Term Futures ETN, dropped 76% over the past 12 months. “If you can very finely time when VIX is going to spike and get out at the right time, yes, one day returns can be huge,” says Samuel Lee, ETF analyst with fund-tracker Morningstar. “But you can’t hold these products for very long.”

    Still, some advisers say the funds can make sense over short periods. Tim Courtney, chief investment officer at Exencial Wealth Advisors in Oklahoma City, says he is “strongly considering” adding Barclay’s iPath S&P 500 Dynamic VIX ETN XVZ +0.52% to his portfolio. “If you’re not looking to add Treasury bonds or government-backed securities,” Courtney says, “it’s one viable alternative.”

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