Don’t be afraid of a volatile stock market.
When investors hear “volatility,” it’s rarely in positive terms. Volatility can scare investors into making poor choices with their portfolios, scaring them out of stocks that they’d be better off holding. In fact, exchange-traded fund providers are increasingly offering products that explicitly try to reduce volatility. But because volatility often coincides with market downturns, many investors look to play volatility, many times as a way to hedge their long positions. You can trade volatility in a few ways, including futures and options. But you can also turn to several exchange-traded products, which aim to make a little money when the market waters really get choppy.
iPath S&P 500 VIX Short-Term Futures ETN (ticker: VXX)
The VXX is one of many funds that invokes the CBOE’s Volatility Index (VIX) — aka the “fear gauge.” The VIX is a measure of market expectations of near-term volatility of the Standard & Poor’s 500 index. But VXX doesn’t invest directly in the VIX, nor does any other fund. Instead, the VXX is an exchange-traded note that tracks the performance of the S&P 500 VIX Short-Term Futures Index Total Return, which invests in first- and second-month VIX futures contracts. So really, this is a play on investors’ and traders’ sentiment toward the VIX.
Expenses: 0.89 percent, or $89 annually per $10,000 invested
iPath S&P 500 VIX Mid-Term Futures ETN (VXZ)
The VXZ is the VXX’s less-talked-about sister fund, with both coming to life back in January 2009. And it’s just like VXX in its construction, except instead of tracking the first- and second-month futures contracts, VXZ tracks the fourth-, fifth-, sixth- and seventh-month futures contracts. Why VXZ? Contango tends to be more of an issue in the shorter-dated VXX, and in general, the VXZ is less sensitive to moves in the VIX. You get a smoother ride and less exaggerated moves to the downside, but it’s more difficult to capture the upside of increased volatility in the VXZ.
Expenses: 0.89 percent
ProShares VIX Short-Term Futures ETF (VIXY)
Unlike the VXX — an exchange-traded note, which is simply debt issuance in a fancy wrapper, and doesn’t actually hold anything — ProShares’ VIXY is an honest-to-god ETF that holds first- and second-month VIX options. The funds perform almost identically, with VIXY enjoying slightly better performance over most periods. It’s also a few basis points cheaper than VXX. But there is a bit of a downside when it comes to tax time. Namely, because the VIXY is structured as a partnership, you’ll be required to fill out a K-1 form each year; with VXX, you’ll simply receive a 1099.
Expenses: 0.85 percent
REX VolMAXX Long VIX Weekly Futures Strategy (VMAX)
The VMAX is a newer fund that takes advantage of weekly futures on the VIX. The idea is that the use of these weekly futures “should result in a higher correlation and beta to the true daily price of the VIX index.” For better or worse, the fund’s movements have better mimicked the VIX than the VXX. For instance, from the 70 percent surge in the VIX from Oct. 25-Nov. 3, VMAX returned 32 percent to the VXX’s 24 percent. However, since VMAX’s inception, the VIX has been broadly down, and the VMAX has better reflected that, with the REX product off 67 percent to VXX’s 59 percent.
Expenses: 1.25 percent
iPath S&P 500 Dynamic VIX ETN (XVZ)
VIX-linked products can catch volatility lightning in a bottle, but contango results in horrendous long-term returns. VXX lost more than 90 percent from its inception through XVZ’s inception in 2011. VXZ was considerably better, though it lost 47 percent. The XVZ was introduced to stem the tide. XVZ dynamically allocates between the short- and mid-term VIX future indices to adjust the “roll cost” — the price to sell one contract before expiration and buy into another. Unfortunately, XVZ has been a long-term loser, off 49 percent since inception. But it’s still better than the VXZ (-84 percent) and VXX (-99 percent).
Expenses: 0.95 percent
ProShares Ultra VIX Short-Term Futures ETF (UVXY)
The thing that most volatility-linked products’ charts will show you over the past few years is that upward spikes are few, far between and short-lived. Thus, if you are going to chase volatility to the long side, it makes sense to get as much bang out of your buck as possible. The UVXY is a 2x leveraged ETF that provides 2x the daily return of the same index used by VIXY. Naturally, the longer-term losses are just vomit-inducing. But that October-November period we mentioned earlier? Twenty-four percent gains for VIXY, but a 54 percent run in UVXY.
Expenses: 0.95 percent
VelocityShares Daily Inverse VIX Short-Term ETN (XIV)
Of course, because going long volatility has been a losing proposition for so long, short products are awfully popular. VelocityShares’ XIV creates its returns by simply tethering to the inverse of the S&P VIX Short-Term Futures index, so the same front-two-month strategy that powers VXX. This ETN trades some 26 million shares daily, and has absolutely smashed the market’s returns this year, up 78 percent with a couple weeks left to go in December versus 11 percent gains for the S&P 500.
Expenses: 1.35 percent
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7 Ways to Trade Volatility With ETFs and ETNs originally appeared on usnews.com
