Market Volatility Jumps: ETFs to Tap
After taking a back seat for most of this year, volatility roared back in recent weeks amid market rotation and growing anxiety about a slowing U.S. economy. The volatility level represented by the CBOE Volatility Index, also known as the fear gauge, jumped above 60 on Aug 5, the highest since March 2020. It is the index's highest reading outside of two distinct market meltdowns, the onset of COVID-19 and the fallout from the failure of Lehman Brothers in September 2008.
This suggests that market worries have started to set in. This fear gauge tends to outperform when markets are declining, or fear levels about the future are high.
Traders are betting that the U.S. economy has lost steam and is on the verge of sliding toward a recession, given rising unemployment, high interest rates and fading confidence in the tech sector. Notably, the tech-heavy Nasdaq Composite Index entered into correction territory (more than 10% off its most recent peak on Jul 10) (read: Inverse ETFs Spike as Nasdaq Enters Correction).
The soft inflation data in mid-July sparked a rotation into small-cap stocks, which are set to benefit most from interest rate cuts, away from the technology stocks. Meanwhile, the latest series of data sparked fears of recession. The labor market cooled in July as the economy added 114,000 jobs, 35% fewer than expected. Unemployment rose to 4.3% — the highest since October 2021 — and represented the fourth consecutive monthly increase. U.S. manufacturing activity dropped to an eight-month low in July amid a slump in new orders.
Investors could benefit from the rising market volatility. While they can’t directly buy the volatility index, several ETF/ETN options are 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 will move higher as long as market turmoil lingers.
iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)
iPath Series B S&P 500 VIX Short-Term Futures ETN focuses on the S&P 500 VIX Short-Term Futures Index, which provides access to equity market volatility through CBOE Volatility Index futures and offers exposure to a daily rolling long position in the first and second-month VIX futures contracts. iPath Series B S&P 500 VIX Short-Term Futures ETN is popular and liquid with AUM of $302.4 million and an average daily volume of 11 million shares. It charges 89 bps in annual fees.
ProShares VIX Short-Term Futures ETF (VIXY)
ProShares VIX Short-Term Futures ETF provides long exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration. ProShares VIX Short-Term Futures ETF has amassed $119.2 million in AUM and charges 85 bps in fees per year. It trades in a volume of 4.5 million shares per day on average (read: 5 Safe ETF Zones to Invest in Amid Rekindled Recession Fears).
ProShares Ultra VIX Short-Term Futures ETF (UVXY)
Investors seeking huge gains in a very short time frame could consider this leveraged volatility ETF. ProShares Ultra VIX Short-Term Futures ETF 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 $134.8 million and charges 95 bps in annual fees. It trades in a volume of 26 million shares per day on average.
2x Long VIX Futures ETF (UVIX)
2x Long VIX Futures ETF seeks twice the performance of the Long VIX Futures Index, charging investors 1.65% in annual fees. It has amassed $63.5 million in its asset base and trades in average daily volume of 16 million shares.
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 where 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).
However, this seems to be a good time to add these products to your portfolio amid recession fears.
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ProShares Ultra VIX Short-Term Futures ETF (UVXY): ETF Research Reports
iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): ETF Research Reports
ProShares VIX Short-Term Futures ETF (VIXY): ETF Research Reports
2x Long VIX Futures ETF (UVIX): ETF Research Reports