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Volatility ETFs Rally with VIX on Fiscal Cliff Jitters


Volatility-linked ETFs tied to Wall Street’s “fear index” were this week’s best performers on worries U.S. leaders won’t be able to hash out a deal to prevent the economy from falling over the so-called fiscal cliff.

Still, the major U.S. stock indices were on track for weekly gains despite Friday’s sell-off, which was triggered by news House Republicans nixed the fallback “Plan B” bill tied to fiscal cliff negotiations. Investors are worried Washington won’t be able to reach a compromise before the year-end deadline, which would trigger automatic spending cuts and higher taxes that could push the economy into recession.

In Friday afternoon trading, the S&P 500 was on track for a 1% weekly gain, the Dow advanced 0.3% and the Nasdaq Composite added 1.4%.

Stock ETFs pared their weekly gains due to Friday’s downside move as the Dow shed more than 100 points.

“With such a staunch group in the House, it looks as if the odds of going into 2013 without a deal have increased,” Kevin Caron, a strategist at Stifel Nicolaus, told Bloomberg News. “I don’t know whether we’re going to reach a deal, when we’re going to reach a deal, if there’s going to be a deal. It’s just a complete wild card at this point.”

The CBOE Volatility Index was up more than 10% at one point Friday to nearly touch 20. Exchange traded products designed to track VIX futures contracts such as iPath S&P 500 VIX Short Term Futures ETN (VXX), VelocityShares VIX Short-Term ETN (VIIX), VelocityShares Daily 2x VIX Short-Term ETN (TVIX) and ProShares VIX Short-Term Futures ETF (VIXY) also rallied. [Volatility ETFs: Is TVIX Going to Zero?]

The leveraged bets on market volatility such as TVIX that have fallen so hard this year were among the top gainers on Friday, reports Brendan Conway at Barron’s.

This week’s top three unleveraged ETFs were VIIX, VXX and VIXY with gains of more than 7% at last check Friday afternoon.

Aside from volatility-linked products, this week’s bottom three unleveraged ETFs were PowerShares DB Silver (DBS), iShares Silver Trust (SLV) and ETFS Physical Silver (SIVR). They were off more than 6%.

Next week, look for economic reports on home prices, new home sales, consumer confidence and pending home sales. Markets will be closed Tuesday for the Christmas holiday.

Story updated to correct this week’s worst-performing ETFs.

Full disclosure: Tom Lydon’s clients own SLV.

The opinions and forecasts expressed herein are solely those of John Spence, 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.