After a wild ride, investors are hoping for the markets to return to normal, but a number of risks still remain and may potentially cause another round of risk-off selling. However, there are a number of exchange traded fund strategies that may help investors mute the swings.
“We’re heading into a summer that is going to remain volatile,” Andrew Sheets, Morgan Stanley’s head of cross-asset strategy, told Bloomberg. “We have upcoming headlines on steel tariffs, we have upcoming headlines on China trade negotiations, we have Nafta, we have an uncertain political backdrop in Italy, we have a new government potentially in Spain. There’s a lot for the market to digest.”
In anticipation of the potential volatility ahead, Sheets advised “taking positioning down” and paring risk exposure to a “more neutral” stance.
JPMorgan Chase & Co. also warned that Italy and trade rifts are only a sign of ongoing risks that have not dissipated.
Acute Global Uncertainty
“A fresh round of acute global political and policy uncertainty that marked the first week of summer foreshadows a likely coming several months of global event risks and potential global shocks,” JPMOrgan strategists led by Paul Meggyesi said in a note. June looks “particularly treacherous.”
Consequently, investors who are concerned about the potential risks ahead may consider CBOE Volatility Index or VIX-related exchange traded products that track VIX futures, which allow traders to profit during rising volatility or hedge against short-term turns.
For instance, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) track short-term VIX futures. Potential traders should be aware that these VIX exchange traded products track the futures market and not the spot price of the VIX.
More aggressive traders have turned to the leveraged ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY), which provides the 2x or 200% daily performance of the S&P 500 VIX Short-Term Futures Index.
Additionally, there are a number of bearish or inverse ETF options with varying levels of leveraged exposure to capitalize off a weakening S&P 500 as well. The ProShares Short S&P500 (NYSEArca: SH) or the Direxion Daily S&P 500 Bear 1x Shares ETF (NYSEArca: SPDN) take a simple inverse or -100% daily performance of the S&P 500 index. Alternatively, for the more aggressive trader, leveraged options include the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), which tries to reflect the -2x or -200% daily performance of the S&P 500, the Direxion Daily S&P 500 Bear 3x Shares (NYSEArca: SPXS), which takes the -3x or -300% daily performance of the S&P 500, and ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU), which also takes the -300% daily performance of the S&P 500.
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