U.S. markets closed
  • S&P 500

    -18.19 (-0.48%)
  • Dow 30

    -469.64 (-1.50%)
  • Nasdaq

    +72.92 (+0.56%)
  • Russell 2000

    +0.88 (+0.04%)
  • Crude Oil

    -1.87 (-2.94%)
  • Gold

    -42.40 (-2.39%)
  • Silver

    -0.98 (-3.56%)

    -0.0099 (-0.81%)
  • 10-Yr Bond

    -0.0580 (-3.82%)

    -0.0091 (-0.65%)

    +0.3200 (+0.30%)

    -2,511.25 (-5.26%)
  • CMC Crypto 200

    -20.25 (-2.17%)
  • FTSE 100

    -168.53 (-2.53%)
  • Nikkei 225

    -1,202.26 (-3.99%)

Volatility ETFs in Focus as Trump Rally Fizzles Out

Sweta Killa

The start to the New Year was a good one global stock market but this seems reversing following the disappointing Trump’s first press conference. This is because lack of clarity on a raft of policy proposals including tax cuts, infrastructure spending and looser regulations has hit investors’ optimism, resulting in volatility and uncertainty in the market. In fact, Trump’s conference has led to skepticism about his ability to keep his promises (read: Trump's First Press Conference Puts These ETFs in Focus).
Additionally, Trump repeated his intention to build a wall along the Mexican border and threatened to impose a “border tax” on companies looking to invest abroad at the expense of domestic jobs. This could result in a trade war and geopolitical tensions.

Along with the fading hopes on Trump’s reforms, the latest trade data from China has added to the fear factor. This is especially true as export dropped for the second consecutive year in 2016 and marked the worst decline since the depth of the global crisis in 2009. The trend might continue this year given that Trump has threatened to impose a 45% tariff on goods imported from China. Moreover, the incoming president is looking to label Beijing as a currency manipulator soon after he takes office on January 20. This would deteriorate the U.S.-China trade and political relationship that would further weigh on the confidence of exporters and investors worldwide.

Given this, most analysts warned that the market would face a higher level of volatility in the coming months after Trump takes office. Volatility level is best represented by the CBOE Volatility Index (VIX). This fear gauge measures investor perception of the market’s risk and tends to rise when markets are sliding or investor panic starts to set in. It is constructed using implied volatilities of the S&P 500 index options, taking both calls and puts into account.

The index climbed more than 11% on Thursday, marking its sharpest daily rise since November 3, 2016, according to FactSet data. This implies that risks are rising and investors could definitely benefit from this trend. While investors can’t directly buy up this index, there are several ETF/ETN options available in the market that can provide some exposure to volatility. These products have proven themselves as short-time winners (read: Why Investors Continue to Pour Money into VIX ETFs).

Below we have highlighted some volatility ETFs that could see smooth trading ahead of Trump’s inauguration. Uncertainty in Trump’s pro-growth policy and commitment to anti-trade plans will flare up these products over the short and medium term.

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

This ETN follows the S&P 500 VIX Short-Term Futures Index, which reflects implied volatility of the S&P 500 Index at various points along the volatility forward curve. It provides investors with exposure to a daily rolling long position in the first and second month VIX futures contracts. The note has amassed $1 billion in AUM and charges 89 bps in annual fees and expenses. The product sees a truly impressive volume level of more than 34 million shares a day.

ProShares VIX Short-Term Futures ETF VIXY

This fund also offers investors the scope to capitalize on the U.S. equity market volatility one month into the future by tracking the S&P 500 VIX Short-Term Futures Index. The product has $174.1 million in AUM and sees heavy average daily volume of 2.7 million shares. The ETF charges 0.85% in expense ratio.

VelocityShares Daily Long VIX Short-Term ETN VIIX

Like the two products, this product also seeks to deliver the daily performance of the same index. However, VIIX is unpopular, having just $10.3 million in its asset base, and sees comparatively low volume of 381,000 shares per day. The ETN charges 89 bps in annual fees.

ProShares VIX Mid-Term Futures ETF VIXM

This ETF tracks the performance of the S&P 500 VIX Mid-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of five months to expiration. It has AUM of $45.8 million and trades in lower volume of under 35,000 shares a day on average. Expense ratio comes in at 0.85% (see: all the Volatility ETFs here).

iPath S&P 500 VIX Mid-Term Futures ETN VXZ

This note seeks to track the S&P 500 VIX Mid-Term Futures Index Total Return, which provides exposure to a daily rolling long position in the fourth, fifth, sixth and seventh month VIX futures contracts. It has accumulated $37.6 million in its asset base while trades in good volume of more than 133,000 shares a day on average. It charges 0.89% in expense ratio.

Bottom Line

Investors should note that these products are suitable only for short-term or mid-term traders. This is because most of the time, the VIX futures market trades in a condition known as ‘contango’, a situation where near-term futures are cheaper than long-term futures contracts. Since 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.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
PRO-VIX ST FUT (VIXY): ETF Research Reports
IPATH-SP5 VX ST (VXX): ETF Research Reports
VEL-VIX ST (VIIX): ETF Research Reports
PRO-VIX MT FUT (VIXM): ETF Research Reports
IPATH-SP5 VX MT (VXZ): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report