Hedge Against a Volatile Year with VIX ETFs

With the equities markets in an ongoing rout, exchange traded funds that track the CBOE Volatility Index, or VIX, are capitalizing on the market weakness as traders hedge against further swings.

Equity investors can utilize VIX-related exchange traded products like the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), a VIX-related exchange traded note, and the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) to track market volatility. VXX was up 5.1% Tuesday while VIXY was 4.9% higher. Over the past month, VXX jumped 27.2% and VIXY increased 27.6%.

Additionally, for the more aggressive traders, the leveraged ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY), which tries to reflect two times or 200% the daily performance of the S&P VIX Short-Term Futures Index, rose 9.6% Tuesday. UVXY surged 52.3% over the past month.

The CBOE Volatility Index is now hovering around 22.3, compared to the average 14.18 in 2014. The VIX is a widely observed indicator for investor sentiment in the stock market and measures the expected or implied volatility of large-cap stock options traded on the S&P 500 index. Exchange traded products that track VIX futures allow investors to profit during rising volatility or hedge against short-term turns.

As the S&P 500’s bull market heads toward its seventh year, Deutsche Bank AG warned its derivatives clients that we will experience more frequent bouts of volatility ahead, Bloomberg reports.

Other derivatives strategists from Bank of America and JPMorgan Chase have already argued that daily volatility will rise in 2014. Deutsche Bank believes that the end of Federal Reserve stimulus, coupled with intermittent panic could lead to more volatility.

Daily oscillations in the S&P 500 have widened over 50% in the past month from last year’s average through December 5.