This year, the VQT was up nearly 2.5 percent through yesterday, and has annualized gains of 11.45 percent since its August 2010 inception. 

Playing Offense

Some investors see VIX ETFs and ETNs as being more than just a defensive hedge––they also see it as a quick winning trade. When the market invariably experiences a bit of periodic indigestion and drops in value, the VIX can move up quickly., And when that happens, leveraged ETNs are a better way to go because they can double or even triple in price in a short time frame.

One option here is the ProShares Ultra VIX Short-Term Futures ETF (UVXY), which moves at a much greater rate than the VIX. To be sure, it’s a very risky method of betting on volatility because shares have fallen sharply as volatility has waned (the fund has walloped investors with a nearly 48 percent loss so far this year), and it sports a hefty 1.41 percent expense ratio. Obviously, this fund should constitute only a very small portion of any portfolio and is meant for quick trading.

But when volatility increases, this fund is likely to quickly double or triple (or more) in value in a very short time frame. For example, as concerns grew in mid-December that the U.S. government might shut down in the face of a budget impasse, this ETF rose more than 50 percent in just seven trading sessions.

The VelocityShares Daily Inverse VIX Short-Term ETN (XIV) tends to perform quite well in times of declining volatility. While the fund has been a winner in the current environment of investor complacency and low volatility (the fund has gained more than 30 percent year-to-date), it’s often best used on a timely basis right after major news events have rattled the markets, such as those dreaded “Black Swans.” The fund has produced annualized returns of 45 percent since its launch in November 2010.

Will the European economic crisis soon pivot back into the headlines? Will the still-unresolved U.S. budget standoff start to de-stabilize U.S. markets? Will unrest in Iran, Syria or elsewhere rock the oil markets? We'll see, but it’s clear that most investors are sharply discounting the possibility of any events that may induce volatility, which counter-intuitively makes this a good time to expect the unexpected.

 

David Sterman has worked as an investment analyst for nearly two decades. He was a senior analyst covering European banks at Smith Barney and was research director for Jesup & Lamont Securities. He also served as managing editor at TheStreet.com and research director at Individual Investor magazine.

First « 1 2 » Next