Wednesday’s ETF To Watch: Volatility ETN (VXX)

by on November 3, 2010 | ETFs Mentioned:

As the election results come pouring in, investors look for the Republicans to take control of the House of Representatives and make gains in the Senate, leaving President Obama with a difficult next two years and limited opportunities to enact any more of his agenda without massive concessions to the right. Meanwhile, Republicans may still be unable to enact legislative goals due to a lack of control in the Senate and Obama’s looming veto. This situation could set the stage for at least two years of legislative stalemates, a development that could have uncertain ramifications for markets in the U.S. and around the world.

Investors will have to quickly digest these new events and their ramifications before another potentially decisive event takes place: the Federal Open Market Committee meeting is on tap today, with the central bank scheduled to announce its policy decision later today in Washington D.C. Most investors assume that the Central Bank will announce its plans to unleash a second round of quantitative easing on the markets, but the quantity and targets of the plan remain a mystery. Some have pegged the program at as ‘little’ as $500 billion and all the way up to $1 trillion and beyond, highlighting the significant amount of uncertainty ahead of the meeting [read Using ETFs As Portfolio Insurance].

Due to the uncertainty hovering over the meeting and the extreme importance of the Fed’s decisions, equity markets could be in for a volatile trading session–and perhaps a volatile few months. One fund that looks to be in focus given today’s confluence of important events is the iPath S&P 500 VIX Short-Term Futures ETN (VXX). The fund tracks the S&P 500 VIX Short-Term Futures Index Total Return, which offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 Index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract [also see How Contango Impacts ETFs].

Expect for the fund to hit volume levels well above its daily average of 24.2 million shares, especially if investors lose confidence in equities in the wake of either election results or the Fed decision. Despite the fund’s immense popularity, it has been among the worst performing non-leveraged funds on the market; VXX has lost 39.4% in the past quarter and 62.3% so far in 2010. However, the fund has gained 1.7% over the past week and this number could surge higher if the Fed disappoints the markets with its QE injection later today [also read VXX to Undergo Reverse Split].

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Disclosure: No positions at time of writing.