Leveraged Volatility ETFs In Focus [iPath S&P 500 VIX Mid-Term Futures ETN]

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August 4, 2014 3:27pm NYSE:TVIX NYSE:TVIZ

technical bounceAfter a smooth ride, the U.S. equity market has started faltering as a large number of concerns built up lately. This is especially true as both the S&P 500 and Dow Jones saw the first monthly drop in six months while the fear gauge – CBOE Volatility Index (VIX)

– soared over 47% in July. VIX tends to outperform when markets are falling or fear levels over the future are high.

Investors should note that volatility increased the most on the last day of July when Argentina defaulted on its debt payment, the struggling Portuguese bank Banco Espirito Santo was ordered to raise fresh capital deepening worries over the health of the European economy, corporate earnings were seen weakening and U.S. labor costs jumped. All these triggered a broad selloff on the day.

Earnings results from big oil giant Exxon Mobil (XOM), the grocery retailer Whole Foods Market (WFM) and packaged food and beverage company Kraft Foods Group (KRFT) have been discouraging and dampened investor’s mood on Thursday. Further, continued turmoil in the Middle East, rising Russian sanctions, uncertainty over the timing of the Federal Reserve’s rate hike and an aging bull market shook the complacency in the stock market seen over the past few months.

In a woe-begotten backdrop, volatility and uncertainty will likely to continue at least in the near term. As a result, investors could look into the volatility products that have proven to be short-time winners in the turbulent times. Notably, leveraged volatility ETFs could lead to huge gains in a very short time frame when compared to the simple products (read: Safe Haven ETFs to Evade Geopolitical Tensions).

Below, we have highlighted two leveraged volatility ETFs for investors seeking higher returns from the uncertain market:

ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY)

This product provides two times (2x or 200%) exposure to the daily performance of the S&P 500 VIX Short-Term Futures Index, which reflects implied volatility of the S&P 500 Index at various points along the volatility forward curve. It offers daily rolling long position in the first and second month VIX futures contracts.

The ETF has amassed about $282.7 million in its asset base while sees solid volume of more than 5.4 million shares per day. It charges 95 bps in fees per year from investors. The fund added nearly 44% over the trailing one-month period (see: all the Volatility ETFs here).

VelocityShares Daily 2x VIX Short Term ETN (NYSEARCA:TVIX)

Like its ProShares counterpart, this note also offers two times exposure to the S&P 500 VIX Short-Term Futures Index. TVIX is more popular with average daily volume of 10.1 million shares while it has over $218 million in AUM. Expense ratio came in much higher at 1.65%. The note is up over 41% over the trailing one-month period.

Bottom Line

These two products have clearly outpaced the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX), which tracks the same index. As such, investors could ride out the near-term volatility with the above-mentioned products but should monitor the VIX futures market carefully before investing (read: Protect Your Portfolio with These Multi-Asset Income ETFs).

This is because most of the time, the VIX futures market trades in a condition known as ‘contango’, a situation where near-term futures are cheaper than long-term futures contracts. Since the volatility ETFs and ETNs must roll from month to month in order to avoid ‘delivery’, the situation of contango can eat away returns over long periods. Further, these products have been terrible performers over the medium and long term.

This article is brought to you courtesy of Sweta Killa from Zacks.

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