July 22, 2009 at 6:00 am by Tom Lydon
Although steady returns and market security did not present itself to investors this year, the fear factor certainly did, and related exchange traded notes (ETNs) that focused on this may stand to do well.
Products that invest in the CBOE Volatility Index (VIX) could have created diversification in the market meltdown, and can do so going forward. Barclays introduced two new ETNs that are a way to purchase “disaster insurance” against market pullbacks, although the products are complex and need to be clearly understood by investors, explains John Spence for MarketWatch.
They are not volatility plays, but rather track VIX futures.
Will trading on uncertainty catch on? One analyst noted that long VIX exposure should be considered as a diversifier, not as a long equity hedge.
ETNs are debt instruments issued by banks that promise to pay an index return, but exposure to credit risk is a threat. ETNs also have different tax treatment. Barclays is selling its ETF unit but keeping the ETN business.
If you consider these ETNs, be sure to watch the trend lines. In their short history, Roger Nusbaum for the Street points out that the VIX has been trading lower as the stock market moves higher.
For more stories on VIX, visit our VIX category.
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