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As Market Volatility Soars, 2 ETFs To Navigate Market Choppiness

By Investing.com (Tezcan Gecgil/Investing.com )ETFsMar 04, 2022 09:48
uk.investing.com/analysis/as-market-volatility-soars-2-etfs-to-navigate-market-choppiness-200511995
As Market Volatility Soars, 2 ETFs To Navigate Market Choppiness
By Investing.com (Tezcan Gecgil/Investing.com )   |  Mar 04, 2022 09:48
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A slew of macroeconomic difficulties washed over Wall Street in the first two months of 2022, leading to heightened market volatility. So, investors have been paying close attention to the CBOE Volatility Index (VIX), also known as the “fear index.”

Introduced in 1993, VIX has become a globally recognized gauge of implied volatility in the US equity market. It rallies when volatility increases and the S&P 500 index falls.

The VIX index is currently hovering at 33, up over 10% since the start of 2022. Given the current geopolitical tensions, levels will likely continue to pick up steam in the coming weeks.

Navigating periods of heightened choppiness can be nerve-racking for some investors. However, portfolio diversification could offer an efficient investment strategy to mitigate risks when volatility rises. In addition, numerous exchange-traded products (ETPs) can be helpful to participate in short-term moves and to build long-term portfolios.

Today, we’ll first look at an exchange-traded note (ETN) that could be appropriate, especially for experienced short-term traders. Then we’ll introduce an exchange-traded fund (ETF) that could appeal to many retail investors. Let’s dive in.

1. iPath S&P 500 VIX Short-Term Futures ETN

  • Current Price: $25.11
  • 52-Week Range: $17.30 - $69.16
  • Expense ratio: 0.89% per year

The iPath® Series B S&P 500® VIX Short-Term Futures™ ETN (NYSE:VXX) is an unsecured debt obligation issued by Barclays. This ETN aims to achieve a daily return that matches the daily moves in short-term futures contracts tracking the VIX index.

VXX Weekly Chart
VXX Weekly Chart

VXX was listed in early 2018 with a maturity date of Jan. 2048. It tracks the S&P 500 VIX Short-Term Futures Total Return Index.

The methodology of the index correlates with the VIX index’s spot price. As VXX’s recent price action has shown, it usually rises in value when stocks fall during the trading day.

So, this ETN could be a tool for traders to hedge their equity portfolios against a market decline in the short term. Put another way, when equity markets are stable or rise, VXX generally declines.

We should remind readers that if a volatility-based ETN is held for more than one day, returns (both positive and negative) become compounded. Therefore, VXX is not an appropriate long-term addition to a retail portfolio.

So far this year, VXX is up 35.5%. Bearish equity traders who anticipate a further increase in market volatility should consider using VXX for short periods in the market.

2. iShares MSCI Global Min Vol Factor ETF

  • Current Price: $102.17
  • 52-Week Range: $93.33 - $108.60
  • Dividend Yield: 2.03%
  • Net Expense Ratio: 0.20% per year

Our next fund choice for today is the iShares MSCI Global Min Vol Factor ETF (NYSE:ACWV). It invests in global shares that have low volatility. The ETF started trading in October 2011.

ACWV Weekly Chart
ACWV Weekly Chart

ACWV, which tracks the MSCI All Country World Minimum Volatility Index, currently has 399 holdings. The top 10 stocks in the fund account for roughly 13% of almost $5.25 billion net assets.

More than half of the companies come from the US, followed by Japan (10.21%), Switzerland (5.94%), Taiwan (4.99%), and China (4.34%).

In terms of sectoral allocations, we see information technology (17.51%), healthcare (15.72%), communication (14.36%), consumer staples (12.10%), and financials (9.75%), among others.

Leading holdings in the portfolio include Verizon Communications (NYSE:VZ); Switzerland-based healthcare heavyweight Roche (OTC:RHHBY) and consumer products giant Nestle (OTC:NSRGY); Waste Management (NYSE:WM), and gold miner Newmont Goldcorp (NYSE:NEM).

The ETF has returned over 7.2% over the past year and hit a record high in late December. Yet, it is down close to 5.6% since January. Trailing price-to-earnings (P/E) and price-to-book (P/B) ratios stand at 21.26x and 3.15x.

The fund’s unique diversification in terms of geography and sectors could help lower long-term portfolios. Therefore, it deserves your attention. Potential investors could regard any further decline as an opportunity to enter ACWV.

As Market Volatility Soars, 2 ETFs To Navigate Market Choppiness
 

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As Market Volatility Soars, 2 ETFs To Navigate Market Choppiness

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Comments (3)
Saif Ullah
Saif Ullah Mar 07, 2022 7:54
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government
Simon Franken
Simon Franken Mar 06, 2022 11:42
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Dear Tezcan, thanks a lot for your articles, that always provide me with additional insight! Could you explain your remark on the VXX ETN not being a longer term appropriate investment? As long as you belief the underlying index can go down further you can keep it? Thanks in advance for clarifying.
Simon Franken
Simon Franken Mar 06, 2022 11:42
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Ok, I understand the near term expected market volatility is derived from the black and scholes option pricing formula and in practice shows a strong negative correlation with the underlying index in the next 30 days and can therefore be used as a hedge for your portfolio in uncertain times or to take a position if you expect further market decline?
SardarZada Khan
SardarZada Khan Mar 06, 2022 11:39
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