Volatility ETFs: The Real Safe Haven?

by on August 9, 2011 | ETFs Mentioned:

Friday saw the unthinkable happen; a downgrade of U.S. debt by Standard and Poor’s, who then went on to downgrade Fannie Mae and Freddie Mac, shattering markets in the process. But now that the decision is in, and there is no looking back, many have fought over whether or not S&P made the right move, especially given the fact that Moody’s and Fitch upheld our AAA rating [see also ETFs To Watch As Debt Ceiling Deadline Nears].

On one of the spectrum, the Obama administration seemed appalled, calling the downgrade a politically motivated action that didn’t take all the facts into consideration. Their major sticking point comes from an extra $2 trillion oversight in projections that S&P later owned up to as a mistake, but still upheld their AA+ rating. Now major businessmen and investors are joining in the battle as Donald Trump publicly criticized S&P, while Warren Buffet said that if a ‘AAAA’ rating was available, he would surely give it to the US. Furthermore, some reports have suggested that a Senate panel will be looking into the S&P downgrade in order to get to the bottom of the historic decision.

Yet on the other side of things, our economy is looking pretty dismal. We are faced with a large budget deficit and a two party system seemingly incapable of agreeing on what our next move should be. The latter issue was one that Obama commented on himself, stating that parties need to put the good of the country before their own self-interest. And while many have refuted the downgrade, other analysts have felt that we deserved it for some time now, as our exorbitant spending has quickly landed us with a sky-high debt-to-GDP ratio [see also Three Defensive ETFs For The S&P Downgrade].

No matter which side of the debate you fall on, looking at the facts may be shocking. This is the first and only downgrade of U.S. debts in history, which is what likely prompted such a massive sell-off yesterday. In fact, the sell-off was one of the worst in recent memory as the S&P 500 sank nearly 6.7% and the NASDAQ was flirting with losses of 7%. Needless to say, the past week has seen some of the most volatile markets imaginable, as securities have endured something of a roller coaster ride.

With markets in a frenzy, volatility ETPs have been in high demand by investors and traders alike. This is because these exchange traded vehicles offer exposure to the theoretical “fear” index known as the VIX, allowing investors to directly invest in market volatility. Prior to ETFs, access to this market was limited, but now, there are a wealth of options available to the average everyday investor. With volatility ETFs sitting in the limelight, we outline five popular options and how they have fared in the past few days of severe instability [see also ETF Insider: Be Wary Of Bargain Shopping].

  • S&P 500 VIX Short-Term Futures ETN (VXX): VXX is by far the most popular volatility ETN, as it tracks short-term VIX futures. Yesterday saw the fund experience an astonishing volume of 102 million shares compared to its average daily volume of just 31 million. Last Thursday, during our first major sell-off, VXX jumped 20% along with shooting up nearly 15% yesterday. Bear in mind, however, that this product is still down over 40% for 2011.
  • Daily Inverse VIX Short-Term ETN (XIV): This ETF is simply the inverse counterpart to VXX and has turned in quite a different performance over the past few days. XIV had been one of the top performing ETP’s of 2011 until recent weeks which saw shattering trading sessions, with a one week return of -26.7%, pushing down to a YTD return of -2%. Thursday saw XIV plummet 19.4% and losses of 14.6% yesterday while its average volume was increased sixfold during Monday’s session.
  • C-Tracks ETN Citi Volatility Index Total Return (CVOL): CVOL does volatility a bit differently, as it tracks implied volatility. So far in 2011, this product has returned an abysmal -38.8%, but for traders patient enough to wait it out, this ETF has provided unprecedented returns in recent days. Aside from its gains of 33.4% yesterday, its four week return comes in at 81.8%, differentiating itself from VXX and possibly making itself an intriguing alternative in the volatility space [see also Reviewing All The VIX ETF Options].
  • S&P 500 VIX Mid-Term Futures ETN (VXZ): VXZ comes from a similar family of VXX, though it tracks mid-term futures as opposed to short-term, giving it a very different risk/return spectrum. This ETF brings in tamer returns, as it ‘only’ jumped 8.4% yesterday. Yet the fund also has a much better longer term performance as well; VXZ is down 18% on the year but up 13.6% over the past 4 weeks. This fund is less popular than its fellow volatility products, as it averages about 850,000 shares exchanged daily, making it less liquid than the major players like VXX and XIV but possibly a fund that is less impacted by adverse conditions such as contango.
  • Daily 2x VIX Short-Term ETN (TVIX): As if measuring volatility was not enough, TVIX puts 2X leverage on short-term VIX contracts, making it one of the most volatile ETFs available in the entire market. On Thursday, this fund shot up 40% and has posted a jaw-dropping return of 105% over the last two weeks making TVIX the official volatility winner for the last few dismal trading sessions, and a potential favorite for investors seeking to bet on further volatility [see Examining VIX ETF Performance During A Sell-Off].

Disclosure: Jared is long XIV.