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Trade Stock Market Volatility With These ETFs

Sweta Killa
·4 min read

Volatility has heightened ahead of the presidential election, which is just less than a week away. Soaring COVID-19 cases in the United States and Europe as well as renewed lockdown measures spurred fears of a prolonged economic slowdown, making investors jittery.

The latest figures from the World Health Organization showed that Europe reported 1.3 million new cases in the past seven days, nearly half the 2.9 million reported worldwide, with over 11,700 deaths, marking a 37% increase over the previous week. The coronavirus surge in Europe has prompted France and Germany to re-impose lockdowns. Meanwhile, the United States, which saw more than 500,000 cases over past week, has seen record daily infections.

According to a CNBC analysis of data from Johns Hopkins University (JHU), Oct 27 marked the third consecutive day when the United States set a record high of average daily COVID-19 cases. The number of new cases in the country hit an all-time high of 71,832, on a seven-day-average, topping the prior record set on Oct 26. The seven-day-average of daily cases reflects a roughly 21% increase compared with a week ago, according to JHU data (read: ETF Strategies to Play as the Coronavirus Outbreak Aggravates).

Additionally, concerns about stalled efforts in Washington toward further fiscal stimulus measures also led to uncertainty in the market.

The volatility level represented by the CBOE Volatility Index (VIX) is on track for its biggest weekly jump since March. This fear gauge has surged nearly 13 points this week to as much as 40.28, its highest peak in more than four months. This implies that market worries have started to set in. This fear gauge tends to outperform when markets are declining or fear levels pertaining to the future are high.

Investors could benefit from this trend. While they can’t directly buy this index, there are several ETF/ETN options available in the market that can provide some exposure to volatility. These products have proven to be short-time winners in turbulent times. Below we have highlighted short-term volatility products that are expected to move higher provided the same sentiments prevail.

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

This is a popular option providing exposure to volatility that sees a truly impressive average volume of about 33.3 million shares a day. The note has amassed $1.2 billion in AUM and charges 89 bps in fees per year. The ETN focuses on the S&P 500 VIX Short-Term Futures Index, which reflects market participants’ views of the future direction of the VIX index at the time of expiration of the VIX futures contracts comprising the index. It provides investors with exposure to a daily rolling long position in the first and second months of VIX futures contracts. The product has gained 22.3% in a week (read: 5 Dividend ETFs to Ride Out Market Volatility).

ProShares VIX Short-Term Futures ETF VIXY

It seeks to profit from an increase 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. It has amassed $315.2 million in AUM and charges 85 bps in fees per year. The fund trades in average daily volume of around 5 million shares and was up 22.3% in a week.

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. It has accumulated $1.5 billion and average daily volume of 39.1 million shares. UVXY charges 95 bps in annual fees and has jumped 34% in a week.

Bottom Line

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. As 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).

Although volatility of volatility products are pretty high, this seems a good time to add these products to your portfolio as the rapid spread of the virus will threaten the stock market at least in the near term.

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ProShares Ultra VIX ShortTerm Futures ETF (UVXY): ETF Research Reports
 
iPath Series B SP 500 VIX ShortTerm Futures ETN (VXX): ETF Research Reports
 
ProShares VIX ShortTerm Futures ETF (VIXY): ETF Research Reports
 
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