Volatility-linked exchange traded products such as iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), VelocityShares VIX Short-Term ETN (NYSEArca: VIIX), VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX), ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY) and ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) have been rallying the past week on fiscal cliff concerns.

The CBOE Volatility Index, Wall Street’s fear gauge, climbed above 20 on Thursday and has jumped about 30% since its Dec. 18 closing price.

U.S. stocks tumbled Thursday after Senate Democratic Leader Harry Reid on Thursday said it appears the U.S. will fall over the fiscal cliff, which would trigger automatic spending cuts and higher taxes. “It looks like that is where we’re headed,” Reid said in a Senate speech.

Volatility exchange traded funds and notes are still down sharply for the year despite the recent bounce. For example, the largest product, VXX, is off about 76% year to date, according to Morningstar.

Volatility ETFs are designed to track VIX futures contracts rather than the spot price. Therefore, they can be hurt by “contango” when longer-dated contracts are higher, or more expensive, than the spot price. The products lose money on the so-called roll trade when they move into new futures contracts.

The VIX hasn’t traded above 20 since July.

iPath S&P 500 VIX Short Term Futures ETN

The opinions and forecasts expressed herein are solely those of John Spence, 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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