Tuesday ETF Roundup: VXX Tumbles, IWM Surges On Risky Asset Demand

Includes: IWM, VXX
by: Eric Dutram

In one of the wildest sessions in recent memory, U.S. stocks plummeted to start the day, remained underwater throughout most of midday trading, only to surge in the final hour to post solid gains across the board. The Dow finished up by about 1.4% while the broader indexes posted more impressive gains as the S&P 500 rose by 2.3% and the Nasdaq accelerated by 3.0% for the day. Gains were pretty much across the board but the biggest moves came in the tech and financial sectors while healthcare and utilities lagged. Meanwhile, in commodity markets, gold ended the day sharply lower thanks to a return to risky assets while oil failed to return to the green, finishing the session down about 50 cents. Other commodities weren’t as lucky either as copper and grains mostly finished lower while some softs, namely coffee, cotton and cocoa, finished the day in the green to keep the day mixed for natural resources across the board.

In currency trading, the U.S. dollar index slipped close to the 79.1 mark as hopes over healthier European banks carried the euro higher for the day. In fact, the euro rose by about 1.7 cents against the greenback while the pound also rose, albeit by much less, against the dollar as well. However, gains were not across the board as the dollar did manage to strengthen against the yen and was pretty firm against the resource currencies as well. Unsurprisingly given the broad risk on trade taking place in the final hour of trading, T-Bill yields surged from their sharp lows yesterday as the two year added three basis points to its yield and the 10-year added eight points to finish the day yielding 1.84%.

One of the biggest winners on the day was the iShares Russell 2000 Index Fund (NYSEARCA:IWM) which gained 6.2% in Tuesday trading. Today’s gains, which came on high volume of just over 127 million shares, was largely a result of hopes from the EU over a bank recapitalization program. This possible move could help to boost shares of banking firms and prevent a contagion from spreading across the sector should the worst happen in Greece. ”There is an increasingly shared view that we need a concerted, coordinated approach in Europe,” Olli Rehn, Europe’s commissioner for economic affairs, told the newspaper. “There is a sense of urgency among ministers and we need to move on,” Thanks to this sentiment, investors scrambled to scoop up high beta and high risk assets, leading to huge inflows for IWM and the rest of the small cap sector, making pint sized companies among the top performers on the day.

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One of the biggest losers in the ETFdb 60 was the iPath S&P 500 VIX Short-Term Futures ETN (NYSEARCA:VXX) which tumbled by just over 7% on the day. Today’s heavy losses largely came to the aforementioned political developments in Europe, as investors abandoned safe assets such as this ETN representation of the fear index in favor of more risky funds. Thanks to this talk of recapitalization, many are now speculating that European governments will help to shore up the continent’s banking system and prevent a Greek default from sending shockwaves throughout the economy. In light of this, investors decided to abandon VXX for the day, making it a pretty poor session to be holding on to this ultra-volatile product.

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Disclosure: Long IWM.

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