With global indices tanking on the notion that there’s no stopping further implosion in Europe regardless of the austerity measures approved by Greece on Thursday, investor panic set in and an alleged fat finger trader mistake on a single Proctor & Gamble (PG) trade sent the US majors down 10% instantaneously. While markets recovered to pre-dip levels, virtually all conventional asset classes were completely clobbered, with the benchmark S&P500 closing down 3.3%.
But there were some winners. Investors in ETFs that exploit fear and market downturns were rewarded handsomely for their patience. Here are a few of Thursday’s top performers:
VXX – iPath VIX (Volatility Futures ETF) – Up 12% - This “fear index” ETF actually spiked over 30% at one point yesterday to settle for a double digit gain with further follow-through in after-hours. Note that the long term secular trend of VXX has been downward, not to mention contango losses from futures rolling, so it may not make for the best “investment” for the long term. See more on volatility trading.
TMF – Direxion 30Yr Treasury (3X Leveraged) -Up 10% – Nobody’s calling into question the sanctity of US Treasuries this week. While the story last year was whether it was time for global reserves to start switching to the Euro, Gold and a basket of emerging market currencies, that went out the window Thursday and the US dollar and Treasuries were the safe haven.
EPV – Ultrashort Europe (2X Leveraged) – Up 10% - This one’s obvious – the leveraged broad Europe equities ETF. With Greeks rioting in the streets basically proclaiming to the world “we’re not paying regardless of what just passed” and massively complex inter-dependencies within European banks, it’s no surprise that the entire eurozone was imploding Thursday. There are now questions swirling around Spain, Italy, Ireland and whether it makes sense to just cut Greece loose and bail out the eurozone banks rather than bail out Greece now and kick the can down the road. There’s no easy solution right now and a sharp reversal is highly unlikely in the near term.
UGL – Proshares UltraGold (2X Leveraged) – Up 6% – With various ways to play the gold story, UGL performed the best Thursday. When all else fails, investors turn to gold and Treasuries. Often utilized as a hedge against inflation, today it was a panic move. While the dollar rallied against the Euro, it did fall against the Yen. When all global currencies start to be called into question, gold is reserved as the sole remaining “universal” currency.
GLD – SPDR Gold Trust – Up 3% – This ETF seeks to mimic the specific return of gold bullion itself. Again, while one of multiple gold investment options out there, this one comes with a higher tax burden since it’s treated like a “collectible”, so make sure to read up on various gold investment options before deciding which one makes the most sense for your particular needs.
EUO – ProShares UltraShort Euro – Up 3% -The Euro is under attack and this ultrashort ETF seeks to replicate double the inverse of the Euro in terms of US Dollars on a daily basis. Therefore, as the Euro continues to slide, EUO will continue to benefit. Over the prior 6 month period, EUO has gained 35%, besting any equities markets.
I always highlight that leveraged ETFs are for near term trades, not long-term investments due to time value decay of the instruments. As long as the trend is sustained, they can actually outperform the stated daily leverage ratio, but when the trend reverses, both sides of these leveraged ETFs decay.
Disclosure: Long VXX and Long EUO. Engaged in a paired short leveraged ETF trade with UGL/GLL.