In This Article:
Volatility roared back in recent weeks amid uncertainty surrounding U.S. trade policy 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 13.4% to 24.87 on March 6, marking its highest close since Dec. 18. This gauge is up 60% over the past month.
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.
According to Bespoke Investment Group, the S&P 500 saw the longest period of heightened volatility since 2020. The index is on track to notch its sixth straight session with a move either up or down of at least 1% — a streak not seen since November 2020.
Though President Donald Trump put a pause on 25% tariffs for many goods imported from Mexico and Canada till April 2, tariffs will still apply to about 50% of Mexican imports and more than 60% of Canadian goods. Trump is set to reintroduce 25% global tariffs on steel and aluminum imports starting March 12. He signed plans for reciprocal tariffs but delayed their implementation until April to allow his administration to negotiate on a one-by-one basis with countries that could be impacted.
Further, President Trump threatened to impose 25% tariffs on automobile, semiconductor and pharmaceutical imports in April. He also threatened to levy new tariffs on Europe and is considering imposing 25% tariffs on international lumber and wood products over the next month or sooner, with more to come.
The ongoing tariff talks have sparked fears of a resurgence in inflationary pressure and could slow down economic growth (read: Trade War Fears Surge: Sector ETFs & Stocks to Watch Out For).
Apart from trade fears, the barrage of data indicates that the U.S. economy is slowing down. The Federal Reserve’s Beige Book and the Institute for Supply Management’s manufacturing reading indicated fear of rising input costs weighed down by Trump's tariff policies. The manufacturing sector slowed in February and U.S. business activity stalled. Consumers are losing confidence in the economy. Concerns have built up in the homebuilder space that tariffs would raise the cost of building materials, including lumber and appliances, leading to elevated home prices and reduced affordability. Homebuilder sentiment hit a five-month low in February.
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 $458.4 million and an average daily volume of 6 million shares. It charges 89 bps in annual fees and spiked 11% on March 6.
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 $185.1 million in AUM and charges 85 bps in fees per year. It trades in a volume of 2 million shares per day on average and surged about 11% yesterday (read: Market Turmoil Raises Appeal for Low-Volatility ETFs).
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 $235 million and charges 95 bps in annual fees. It trades in a volume of 18 million shares per day on average and rose 13.4% on March 6.
2x Long VIX Futures ETF (UVIX)
2x Long VIX Futures ETF seeks twice the performance of the Long VIX Futures Index, charging investors 1.77% in annual fees. The Index measures the daily performance of a theoretical portfolio of first and second-month VIX futures contracts that are rolled daily. UVIX has amassed $125.1 million in its asset base and trades in average daily volume of 17 million shares. It surged 22.1% in yesterday trading session.