The American economy heaved a sigh of relief after it averted a
costly debt default. While this sent the S&P 500 and Nasdaq
into a rally, volatility ETFs took a backseat to other factors.
Along with the debt deal, reduced possibility of tapering offered a
wild card entry to equities but emerged as threats to the
These products tend to do well when markets are sliding or fear
levels over the future are high. As neither of these events came to
pass thanks to the sluggish economic indicators in the U.S., the
market does not foresee the Fed scaling back before the
first quarter of next year
Volatility ETFs: Three Factors Investors Must Know
Why No Taper is Likely Now
On Sep 18, the Fed stuck to its easy money policy awaiting more
evidences of progress in the economy and improvement in the job
market. The Fed trimmed its economic growth forecasts for this year
and the next, and will continue to hold interest rates near zero
until the jobless rate falls to 6.5% or lower and inflation rate
goes above 2.5%.
Since then, the market is closely monitoring each and every
economic movement and debating on the likely time and amount of the
taper. The recent deluge of U.S. data pertaining to inflation,
consumer confidence, job level and industrial production were,
however, underwhelming. These suggest that the monetary stimulus
will stay here at least for the near term (read:
Utility ETFs: Winners After the No Taper
Notably, the inflation rate was
in August 2013, down sequentially. Consumer confidence in the U.S.
dropped to the
in 5 months in September and October, and is likely see a sharp
downfall in the sentiment.
The unemployment rate fell slightly to 7.2% from
in August. Job growth in September was also lower than expected.
Orders for a broad range of U.S.-based capital goods
in September. These languishing data elevated the expectation of a
Coming to the corporate front, although earnings expectations for
the fourth quarter for S&P companies are shaping up
decently, they are lagging previous expectations. Barring some
solid results, the overall guidance was in a sub-par tone,
signaling a lukewarm recovery in the U.S.
Volatility Products on Downhill Ride
Continued monetary stimulus will keep infusing cheap dollar into
the economy that shifted the investors' focus toward high-yielding
equity markets. As such, volatility products saw dire trading in
the last month.
The fear-gauge CBOE Volatility Index (VIX) plunged about 20% to
settle at 13.41 while the S&P 500 index gained about 5.5%
during this period. Below, we have highlighted three most popular
products that have seen rough trading and might continue to do so
in the coming days.
iPath S&P 500 VIX Short-Term Futures ETN
This is the most popular volatility ETN on the market, focusing on
the S&P 500 VIX Short-Term Futures Index. The Index offers
exposure to a daily rolling long position in the first and second
month VIX futures contracts (read
Why I Hate Volatility ETFs
The note has amassed nearly $1.25 billion in AUM and charges 89 bps
in fees per year from investors. The product lost 12.7% over the
ProShares VIX Short-Term Futures ETF
This fund offers investors to play on the U.S. equity market
volatility one month into the future by tracking the S&P 500
VIX Short-Term Futures Index. The product has $217.8 million in
AUM. The ETF charges 0.85% in expense ratio but shed 13% in the
VelocityShares Daily Long VIX Short-Term ETN
This product also seeks to deliver the daily performance of the
S&P 500 VIX Short-Term Futures Index. Being an unpopular
choice, VIIX could accumulate just $11.6 million in its asset base.
The ETN charges 89 bps in annual fees. It dropped by 12.8% over the
past month (see more in the
This is really not a good time for volatility products.
However, investors should note that the resolution on the debt
ceiling is a short-term respite. According to the deal, government
agencies will be funded till January 15th and the debt limit will
be extended till February 7th.
But after the specified period, the gridlock might be recreated,
opening up the doors for volatility products. The same case holds
for taper talk as well which is likely to be resumed in early next
year. Till then, investors may want to ignore volatility (read: 3
Bond ETFs Popular in the 'No Taper' Aftermath
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VEL-VIX ST (VIIX): ETF Research Reports
PRO-VIX ST FUT (VIXY): ETF Research Reports
IPATH-SP5 VX ST (VXX): ETF Research Reports
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