Volatility ETFs to Consider During the Calm Before a Storm

As the markets push toward new highs and grow more complacent, investors may want to take a look at exchange traded funds that track the CBOE Volatility Index to hedge potential risks ahead.

The VIX, or so-called fear index, 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.

Related: ETFs to Hedge Against a Turn in a Complacent Market

For instance, as the S&P 500 dipped 0.5% on Monday, the VIX jumped 12.4% to 13.51, which is still around its lowest level for the year.

Traders also be looking to VIX-related ETPs as a means of hedging market risks. On Monday, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) gained 1.6%, ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) rose 1.5% and the leveraged ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY) increased 3.2%. VIXY also saw trading volume surge to 5.7 million on Monday, or close to eight times its average daily volume.

Mohamed El-Erian, chief economic adviser to Allianz and chair of President Obama’s Global Development Council, warned of potential “jump conditions” in light of potential points of weakness and uncertainty around the globe, such as fragile Italian banks, political risk in Turkey and vulnerability to lone wolf attacks.