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Owen Zukovich
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I am a recent graduate of Drew University in Madison, NJ. I have a bachelors of Arts in Economics and am an Investment Advisor Representative of Right Blend Investing in Hillsborough, NJ. I was the Co-Chair of the Drew University Socially Responsible Investment Committee form 2012-2013 and... More
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  • VQT: The Ultimate Hedge?

    Barclays S&P 500 Dynamic VEQTOR ETN VQT

    The Ultimate Hedge?

    One of the major problems in today's markets is volatility. How do investors properly manage volatility and hedge their investments? Sure you can actively manage your portfolio, clicking the refresh button 20 times a second and hope for the best. But what is the best option? Buy gold? Buy the VXX? Or just sell your equities and go 100% fixed income?

    None of the above are really viable options. Gold has not acted like a hedge in the past few months and as of now doesn't really know what it is or what it wants to do. Is it a protection against inflation or a commodity or neither? In my opinion, gold has acted more like an equity in the past two months and can not be trusted as a large part of any portfolio. It needs to be actively managed.

    The below chart, compliments of Yahoo Finance, shows the ever so popular gold ETF GLD against the US markets over the last three months. As you can see GLD is not hedging and has lost almost 10% over this time.

    (click to enlarge)

    Source: Yahoo Finance

    The VXX is great as a hedge against volatility! Hmm…not so much. If you want to get killed on commission and never pry your eyes away from your computer screen, then yes, it's good. But for the majority of us that are not special enough to trade commission free and like to see the sunlight, so, it's not a good option. The VXX has gone from just under $23 a share in mid June to just over $15 at the end of July. That ladies and gentlemen is one volatile product. (Not to mention the negative yield roll and the problems of buying futures contracts, but that I will save for a longer article.)

    The chart below, also compliments of Yahoo Finance, compares the VXX against the US markets over the last three months. And well what I can conclude is, well nothing. I see the US markets at a pretty much stable growth while the VXX is all over the place. To put it simply, the lines of the US markets create a healthy person's heartbeat and the VXX line is symbolic of a heart attack.

    (click to enlarge)

    Source: Yahoo Finance

    So now that you're scared of the volatility in equities, you're going to go all fixed income, right? Well, you could but then you are open to interest rate risk and with the Fed acting like a toddler who is unable to make up its mind, it's a bad idea.

    The answer is Barclays S&P 500 Dynamic Hedge Vector ETN VQT. This little product is brilliant. It basically is the best of two worlds put together in one ETN. So here is how it works. The ETN invests in equities in the S&P 500 when volatility is low. The benefit of this is that you as an investor get all the rewards of equities when volatility is low. You can partake in the equity growth without trading on a daily basis. When volatility is high, the ETN buys the VXX. I know I just bashed the VXX above, but in this case, it is good. (As a whole the VXX is good, I just do not want to manage it. I enjoy the sunlight and do not need the added stress of the VXX.) But if someone else is doing the due diligence, then I am all for it! By buying the VXX I do not have to rebalance to manage volatility, VQT does it automatically. I get the possible equity like growth from the VXX, which certainly beats the poor yields of fixed income these days.

    The best part of VQT is that when the Vector Index loses more than 2% in 5 days, the fund goes to all cash. Now that is management I have no problem paying for!

    (click to enlarge)

    Source: Yahoo Finance

    Disclosure: I am long VQT.

    Additional disclosure: Owen Zukovich is an Investment Advisor Representative of Right Blend Investing, LLC in Hillsborough, New Jersey.

    Jul 29 1:11 PM | Link | 1 Comment
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