After a week that has seen some of the steepest sell-offs in recent memory, there are plenty of portfolios drenched in red. Before Thursday’s reprieve, a string of negative developments hammered markets around the globe, sending many equities down by double digits in a matter of a few short days. The recent bout of instability stemmed from uncertainty in Europe and worries over inflation in emerging markets, but largely was a result of the downgrade handed to the U.S. by Standard and Poor’s, the first downgrade of U.S. debt by a domestic credit rating agency in history.
The downgrade sparked public opinion from the Obama administration, which called it a facts-be-damned decision, all the way to Warren Buffet, who was quoted as saying that if there was such thing as a AAAA credit quality, he would give it to the U.S. But for investors around the globe, the downgrade was perhaps the spark that set off a powder keg that had been primed by dismal job creation progress, mounting debt burdens, and declining industrial activity.
Regardless of the cause, the effect was crystal clear. Just about every corner of the equity market dropped like a stone over a stretch that began with last Friday’s freefall and culminated with another steep sell-off on Thursday. During that stretch, the S&P 500 SPDR (NYSEARCA:SPY) lost a whopping 11%. EEM, a barometer of emerging markets, was down a staggering 14%, while the Vanguard European ETF (NYSEARCA:VGK) slid 13%.
In other words, there was no shortage of big losers among the ETF universe from the tumultuous stretch. But there was also a slew of exchange-traded products that posted huge gains during the period that wiped out billions in net worth. In fact, a handful of exchange-traded products jumped by more than 45% between the close of trading on August 3 and the final bell a week later.
TVIX: Up 90.4%. The Daily 2x VIX Short-Term ETN offers exposure to an index comprised of short-term futures contracts linked to the VIX, a widely-followed benchmark that measures expected volatility in U.S. equity markets. As the name suggests, TVIX offers daily leverage, seeking to deliver daily results that correspond to 200% of the futures-based index. As anxiety spiked, so too did the VIX. And the daily reset feature that has been the subject of ridicule in the past gave an extra boost to TVIX during the freefall. This ETN jumped by more than 90% during a five-day stretch, highlighting the potential “portfolio insurance” that volatility exchange-traded products can offer.
CVOL: Up 81%. The second ETN on this list is another product that offers exposure to equity market volatility through the use of futures contracts. But CVOL is unique from some of the other ETPs detailed below in that the underlying index consists of two components: Third- and fourth-month VIX futures, and short exposure to the S&P 500 Total Return Index. The combination of those two elements sent this relatively small product skyrocketing in recent sessions; CVOL gained more than 80% during the wild five-day stretch.
It should be noted, however, that CVOL (like TVIX) is still down on the year. Though these ETNs have been flying high lately, the stiff contango-related headwinds and daily reset feature are reasons why these products are used primarily by short-term traders and not by buy-and-holders.
RUSS: Up 73.3%. While all equity markets took it on the chin over the past few sessions, few were hit harder than Russia; the oil-rich economy was done in by a double whammy of equity market weakness and a freefall in oil prices. The nation is heading for its longest losing streak in 12 years, citing the U.S. downgrade and slumping oil prices as the reasons for the very negative tone in the nation’s markets. RUSS provides inverse leveraged exposure to Russian equity markets, and that objective has pushed the fund sharply higher while traditional long Russia ETFs plummeted.
It should be noted that the compounding of daily returns once again worked for investors who held RUSS for the entire five-day stretch. RSX, which is linked to the same index that underlies RUSS, lost less than 20% during the same period, meaning that the gain turned in RUSS was far greater than 3x the change in the underlying index over the same period.
RTSA and ROSA: Up a respective 59% and 50%. The Short Extended Russell 2000 TR Index ETN (RTSA) and the Short Extended Russell 1000 TR Index ETN (ROSA) are rather unique ETNs. Unlike RUSS and other leveraged ETPs that seek to deliver amplified returns on a daily basis, these ETNs are part of a suite that seeks to deliver leveraged results over the full term of the underlying note. As a result, the effective leverage offered by these products can vary significantly across time, and just ahead of the sell-off both RTSA and ROSA were offering effective leverage that far exceeded 3x. (See Inside The 8x ETN for a more in-depth explanation of this phenomenon.) When markets cratered, the result was a huge run-up in price; both of these ETNs popped by more than 50%.
The flip side of this exposure came during Thursday’s rally; RTSA lost more than 10.2%, while ROSA slid by 11.7%.
VXX, VIIX and VIXY: Up a respective 46%, 45.6% and 45.6%. These three volatility ETPs each offer exposure to indexes comprised of short-term VIX contracts, and all three skyrocketed as expectations for rocky trading sessions intensified. VIXY is structured as an ETF, while the other two products are exchange-traded notes.
FSG: Up 45.4%. The 2x Gold Bull/S&P 500 Bear seeks to replicate an index which tracks the spread or the difference in daily returns between the gold and U.S. equity market segments. As investors sold off equities and piled into gold as a safe haven, the combination of those exposures resulted in a big jump in this relatively new product. The performance of this ETF dwarfed the otherwise impressive gains in gold prices – GLD was up a nice 8% – highlighting the potential powers of spread trading ETPs.
Disclosure: No positions at time of writing.
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