VIX ETFs to Hedge Market Volatility

May 28th at 6:00am by Tom Lydon

Some traders use exchange traded products linked to CBOE Volatility Index futures to hedge against any quick downturns in the market. However, individual investors need to be careful with volatility-linked funds and understand they don’t perfectly track the VIX spot price, and can be hurt by “contango” in futures markets.

The VIX, Wall Street’s so-called fear index, eased back last week after shooting higher on concerns over Greece and European debt.

“Thursday’s close of 24.49 was above its January high,” Toni Truner of TrendStar Trading Group said in an Equities report. “It was the most volatile candle I’ve seen on the VIX for quite some time now. So it does appear that we are now moving at a much faster pace, and fear is definitely coming into the market as the situation in Europe is deteriorating rapidly.”

The VIX has crossed its 50-day moving average and is finding resistance at its 200-day level of 25.

The CBOE Index, or a widely viewed gauge of fear in the market, moves higher as investors hedge their positions with puts. With more fear, investors pile into more puts and the VIX rises. [Be Careful with Volatility ETFs]

Investors interested in hedging a position as market fear increases on Eurozone concerns or other market related problems may take a look at VIX-related ETFs like the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) and ProShares VIX Mid-Term Futures ETF (NYSEArca: VIXM).

The VelocityShares Daily 2x VIX Short Term ETN (NYSEArca: TVIX) is the largest VIX-linked fund available. However, investors should note that this is a leveraged-long exchange traded note. Leveraged funds provide 2x the daily VIX exposure. Additionally, the TVIX fund has recently come under fire as ts prices plunged after the issuing bank provided new shares of the ETN. [Volatility ETFs: Checking in on the TVIX Premium]

ProShares VIX Short-Term Futures ETF

For more information on market volatility, visit our volatility category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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