American Default Worries are Great News for These ETFs

Eric Dutram

With America seemingly on the edge of default, many citizens and investors are not taking kindly to the proceedings in Washington D.C. Both sides appear to be at odds over a deal, with the reputation of the United States hanging in the balance.

And with both sides still struggling to compromise, many investors are starting to sell stocks, or at least are staying on the sidelines until a deal can be made. This has pushed down a variety of assets, causing markets to slump in Tuesday trading, with more sluggish trading predicted by many if the impasse remains (see The Government Shutdown Puts These ETFs in Focus).

Any Winners?

Yet despite this lackluster performance, there are a couple of exchange-traded products which have been surging as a result. These products tend to feed off of fear and can thus be solid bets during times of market turmoil.

Below, we highlight three such types of products that had great sessions on Tuesday, and could continue to move higher if the fate of the debt ceiling remains uncertain. All three have proven to be winners in woeful investing climates, and thus could be well positioned for further gains if a compromise remains elusive:

Volatility ETFs

Some of the top ETF performers on the day were double leveraged volatility products. These two, UVXY and TVIX, both added more than 11% on the session as investors increased their bets on the fear index (see Play Political Gridlock with These 3 Volatility ETFs).

Beyond these leveraged products, unlevered funds like VIIX, VIXY and VXX all gained at least 6% on the day as well. Arguably VXX is the most well-known of the group and this product saw more than 84 million shares move hands on the session, nearly double its usual total.

Clearly, investors are starting to bet on volatility as a way to protect their portfolios in this risky time.

Gold Miner ETFs

Another product type that has attracted interest in this environment is gold, and specifically gold miners. Products such as GDX (which targets large cap miners) and GDXJ (which targets junior gold miners) added more than 2% on the session.

While this might not sound like a lot, it is important to remember that broad equity markets dropped nearly 1% (depending on the benchmark), suggesting that these gold miners pushed through the trend in the space (see Gold Mining ETF Investing 101).

And once again, strong volume was seen in this corner of the market suggesting that there is definitely some strong interest in gold miners as a hedge against either a drop in the dollar, or risky assets in general.

A host of inverse ETFs

When broad markets are tumbling, inverse ETFs—which generally take the opposite of the return in a benchmark—can be winners. This was certainly the case in Tuesday trading, as high beta names, and those that stand to lose the most from a risk-off trade, led the way on the session.

In particular, the Direxion Daily Emerging Markets Bear 3x Shares (EDZ) led the way with gains of 2.9% on the day. Meanwhile, two small cap focused products in the inverse leverage space—SRTY and TZA—also saw gains in excess of 2%, while semiconductor (SOXS) and financials (FAZ) saw similar gains too (see all the Inverse Equity ETFs here).

These names are either high beta, or are among the biggest winners as of late. And should we see a default scenario, or even just more worries over a breakdown, these inverse ETFs could be big winners once again.

Bottom Line

Many stocks and ETFs look to face weakness if the government can’t find a solution. This could be especially true if major ratings agencies cut their rating on American debt, or if foreign nations (which are big holders of T-bills) start to voice louder concerns (see Earn a 6% Yield with these 3 International ETFs).

These trends could definitely result in some losses, though there are several ETFs that could benefit if markets remain sluggish. Any of the above types appear to be well positioned, so for investors truly worried, a hedge with any of the above options may be an interesting choice.

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