Now May Be The Time To Insure Your Portfolio With Volatility Funds

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Includes: TVIX, UVXY, VXX
by: Christopher F. Davis

The markets are fine, perfectly calm, nothing to worry about here. At least that's what the Chicago Board Options Exchange Market Volatility Index (VIX) would have you believe. The VIX, for those who may be unaware, a popular measure of the implied volatility of S&P 500 market index . You may hear it often referred to as the fear gauge or the fear index. The VIX is a measure that is supposed to represent the market's expectation of stock market volatility over the next 30 day period. Right now, the VIX is at a paltry $17 and has a 52 week range of $13.66 to$ 48.00. For those investors who believe all is not well in this market, and that the slightest bad news could send the S&P down 50 handles, you may want to consider adding an ETF that tracks the performance of the VIX for insurance, either outright or via in the money call options. However, since VIX is not directly investable, exposure to equity volatility is often obtained though VIX futures.

I recommend the following three indexes that I trade as a play on volatility followed by a brief fund explanation and recent price action:

Ipath S&P 500 short term VIX futures ETN (VXX): This investment seeks to replicate, net of expenses, the S&P 500 VIX Short-Term Futures Total Return Index. The index offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500 index at various points along the volatility forward curve. The index futures roll continuously throughout each month from the first month VIX futures contract into the second month VIX futures contract. The fund has an annual expense ratio of 0.89%, is currently trading at $13.00, and has a 52 week trading range of $12.50-$59.18.

VelocityShares Daily 2x VIX ST ETN (TVIX): The return on this fund is linked to twice (2x) the daily performance of the S&P 500 VIX Short-Term Futures. It was designed to provide investors with exposure to one or more maturities of futures contracts on the VIX, which reflects implied volatility of the S&P 500® Index at various points along the volatility forward curve. The calculation of the VIX is based on prices of put and call options on the S&P 500 Index. This fund has a 1.65% expense ratio and currently trades at $3.40 and has a 52 week range of $3.12-$109.17.

ProShares Ultra VIX Short-Term Fut ETF (UVXY): The investment seeks to replicate, net of expenses, twice the return of the S&P 500 VIX Short-Term Futures index for a single day. The index measures the movements of a combination of VIX futures and is designed to track changes in the expectation for one month in the future. The fund has an expense ratio of 1.41%, currently trades at $7.00 and has a 52 week range of $6.53-$244.80.

In summary, volatility is very low at the moment, and given where we have been in the last 52 weeks, the last 5 years and that there are many fiscal problems throughout the world, a few pieces of bad news and this markets' volatility will spike. Consider picking up some insurance with these indexes.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in UVXY over the next 72 hours.