This article was originally published on ETFTrends.com.
In a year market by market volatility, it is not a surprise to find that some of the best performing ETFs of 2018 are not the typical stock market categories of yesteryear.
Among the best performing non-leveraged exchange traded products of 2018, strategies that track the VIX or CBOE Volatility Index, a gauge of market fear, topped the list. Year-to-date, the iPath B S&P 500 VIX S/T Futs ETN (VXXB) jumped 56.4%, VelocityShares Daily Long VIX Short-Term ETN (VIIX) surged 53.0%, iPath S&P 500 VIX ST Futures ETN (VXX) advanced 52.7%, ProShares VIX Short-Term Futures (VIXY) increased 51.7%, iPath Series B S&P 500 VIX Mid-Term Futures ETNs (VXZB) gained 31.5%, iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) added 27.4% and ProShares VIX Mid-Term Futures (VIXM) rose 26.9%.
The VIX is a widely observed indicator for investor sentiment in the stock market and measures the expected or implied volatility of large-cap stock options traded on the S&P 500 index. ETFs that track VIX futures allow investors to profit during rising volatility or hedge against short-term turns.
If investors want to hedge against any market risks or bet on volatile turns, people would typically utilize VIX futures, which are priced based on the forward value of the VIX. Since investors can’t invest in the VIX Index itself, many typically use futures to hedge positions.
Investors should note that VIX futures are not the same as the VIX spot price. A VIX futures index has historically been less volatile than the VIX, which may limit risk exposure for traders but also limit potential short-term gains.
Additionally, since the VIX-related indices track futures, the tools may be subject to the negative effects of contango in the futures market. The S&P 500 VIX Short Term Futures Index rolls contracts every day to gain a notional exposure that is always 30 days out. However, since the VIX market is perpetually in a state of contango, where later dated contracts are costlier than near term contracts, the index is selling low and buying high each time it rolls over its contract.
Natural gas prices and related ETFs climbed as traders jumped on the the latest weather projections of a potentially colder-than-expected winter. Prices, though, pulled back in recent weeks on warmer temperatures toward the end of the year, but UNG is still trading at near its highest level in over a year.
After plunging toward the end of 2017, the iShares MSCI Qatar Capped ETF (QAT) , the lone Qatar equity-related ETF, returned 23.2% year-to-date. The Middle East market suffered through boycotts imposed by its Arab neighbors. Saudi Arabia, the United Arab Emirates, Bahrain and Egypt cut diplomatic and transport ties with Qatar in June, which weighed on Doha’s imports and triggered the withdrawal of billions of dollars of deposits from Qatari banks. QAT's gains in 2018 more-or-less recouped its losses suffered since enduring an embargo that began last year.
Lastly, the AdvisorShares Dorsey Wright Short ETF (DWSH) strengthened by 22.9% year-to-date. DWSH scours the markets for underperformers and short sells securities that demonstrate the highest relative weakness. Securities selected will primarily be large-capitalization U.S. equities, consisting of a short equity portfolio with about 75-100 holdings that begin with a modified equal weighting. When capital markets experience a downturn, DWSH’s strategy can allocate its short exposure more broadly to the domestic equity market – by shorting individual ETFs or futures contracts – seeking to enhance its total return and effectively hedging long equity exposure.
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