Despite investor nerves about exchange traded notes (ETNs) and their inherent credit risk, along with general market nerves, Barclays has two new ETNs that give investor access to volatility tracking.
The introduction of this new asset class will enable sophisticated investors to protect themselves from the next big crash, and it also provides useful information to average investors.
Volatility, Explained. For those of you who don’t know what the significance of volatility is, it is the estimate of the certainty of what investors, traders and speculators believe the bid/ask price of a security is. To take it a step further, there is a negative correlation between volatility and stock prices, meaning as volatility increases, stock prices decrease. For a near term measure of this instability, turn to the VIX index.
How They Work. These ETNs don’t actually track the VIX index itself, they track a basket of rolling volatility futures, states Bradley Kay of Morningstar. These ETNs will actually produce a negative return and the yield on the cash that serves as collateral for the futures helps dampen the losses.
As we all know, there are no free rides. If you want to pick up astonishing returns, you must be willing to stomach huge risks and if you want stability and safety, be ready to give up some of the returns. These ETNs are fairly tricky, familiarize yourself with how they work and don’t overextend yourself if you do choose to utilize them.
The Details. The iPath S&P 500 VIX Short-Term Futures (VXX) and the iPath S&P 500 VIX Mid-Term Futures (VXZ) both come with a 0.89% expense ratio. They give investors tools to hedge their portfolios against plunges by using futures contracts, says Hannah Glover for Ignites.
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.