VIX ETFs Surged as EM Troubles Spread

ETF Trends

Trouble in the emerging markets sent the CBOE Volatility Index, or “VIX,” along with related exchange traded funds, soaring. While volatility was abating Monday, investors may be in for more turmoil ahead.

“The experience of the marketplace this past week is going to be indicative of this entire year,” BlackRock Inc. (BLK) Chief Executive Officer Laurence D. Fink, said at the World Economic Forum in Davos, Switzerland, Bloomberg reports. “We’re going to be in a world of much greater volatility.”

The VIX jumped 47.1% to a high of 18.9 Monday, compared to the 12.9 close last Wednesday. However, the volatility index was down 5.9% and now hovers around 17.3.

The index has been reflecting a complacent equities market as stocks rallied from last year. With readings higher after the bout of volatility, the index is still hovering around its historic average.

Volatility spiked after emerging market currencies Turkish lira, South Africa’s rand and Argentina’s peso plunged, along with China growth concerns. [Tapering Bets Send EM Currencies Reeling]

“Markets have become agitated by the slide in currencies of weak emerging economies, more-pronounced liquidity concerns in China and disappointing economic data from the US,” Gary Dugan, chief investment officer Asia and Middle East at Coutts, said in a Financial Times article.

The iPath S&P 500 VIX Short Term Futures ETN (VXX) , a VIX-related exchange traded note, and the ProShares VIX Short-Term Futures ETF (VIXY) both rose almost 9% over the past week. Nevertheless, VXX was down 0.8% and VIXY was down 0.9% Monday.

Meanwhile, the leveraged ProShares Ultra VIX Short-Term Futures (UVXY) , which tries to reflect two times or 200% the daily performance of the S&P VIX Short-Term Futures Index, is up 20.2% since last Wednesday. UVXY is down 2.7% Monday. The ETF underwent a 1 for 4 reverse split Friday.

Investors need to keep in mind that these ETFs are designed to track CBOE Volatility Index futures contracts, not the VIX spot price. It’s a very important difference.

Volatility products are designed to “roll” the contracts over periodically to maintain exposure to VIX futures. They can lose money on this trade when longer-dated contracts are more expensive than the front-month contract, or when markets are said to be in “contango.”

iPath S&P 500 VIX Short Term Futures ETN

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For more information on the CBOE Volatility Index, visit our VIX category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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