5 ETFs for Fear-Riddled Markets

08/10/2011 9:00 am EST

Focus: ETFS

With markets and investors in a frenzy, these 5 ETFs, which are specially designed to track the Volatility Index (VIX), have been making astonishing moves that could continue as long as the instability does.

No matter which side of the debt-ceiling debate you fall on, looking at the facts may be shocking. This is the first and only downgrade of US debt in history, which is what likely prompted such a massive selloff on Monday (August 8).

In fact, the selloff was one of the worst in recent memory, as the S&P 500 sank nearly 6.7% while the Nasdaq was flirting with losses of 7%. Needless to say, the past few trading sessions have seen some of the most volatile markets imaginable, as securities have endured something of a roller coaster ride.

With markets in a frenzy, volatility exchange traded notes (ETNs) and exchange traded funds (ETFs) have been in high demand by investors and traders alike. This is because these vehicles offer exposure to the theoretical “fear” index known as the Volatility Index (VIX), allowing investors to directly invest in market volatility.

Prior to the advent of ETFs, access to this market was limited, but now there is a wealth of options available to the average, everyday investor. With volatility ETFs sitting in the limelight, we outline five popular funds and how they have fared in the past few days of severe market instability.

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. On Monday, the fund experienced an astonishing volume of 102 million shares traded, as compared to its average daily volume of just 31 million.

Last Thursday, during our first major selloff, VXX jumped 20% along with shooting up nearly 15% on Monday. Bear in mind, however, that this product is still down over 40% for 2011.

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Daily Inverse VIX Short-Term ETN (XIV): This ETN 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 exchange traded products (ETPs) of 2011 until recent weeks, which saw shattering trading sessions, with a one-week return of -26.7%, pushing the fund down to a year-to-date (YTD) return of -2%.

Thursday saw XIV plummet by 19.4%, and Monday produced losses of 14.6%, while its average volume was increased six-fold during Monday’s session.

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NEXT: 3 More ETFs for Trading Volatility


C-Tracks ETN Citi Volatility Index Total Return (CVOL): CVOL treats 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% on Monday, its four-week return comes in at 81.8%, differentiating itself from VXX and possibly making for an intriguing alternative in the volatility space.

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S&P 500 VIX Mid-Term Futures ETN (VXZ): VXZ comes from a similar family as 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% on Monday.

However, the fund also has a much better longer-term performance: VXZ is down 18% on the year but is up 13.6% over the past four 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.”

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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 on 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.

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See also: The Leveraged ETF Safety Kit

By Jared Cummans, contributor, ETFdb.com

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