Looking for a short term trade? This ETF carries risk, but exceeds it when volatility increases
Volatility resurfaced again last week, with US stocks posting their worst week since June as traders reacted to growth fears, tepid inflation data and the prospect of a 100bp rate hike. basis by the Federal Reserve. It was Wall Street’s fourth losing week in five, underscoring the fragility of the stock market. But with the stock market down, one exchange-traded fund performed particularly well: the ProShares Ultra VIX Short-Term Futures ETF (UVXY), which rose more than 13% last week. In contrast, the S&P 500 fell about 5%. UVXY is an inverse volatility ETF with a track record of outperforming periods of extreme market volatility. The CBOE Volatility Index (VIX), widely known as Wall Street’s fear gauge, saw a recent rise, trading at 27.27 at one point last week – a touching distance from the bar of 30 which generally indicates high volatility. It has been steadily climbing above the 20 level for nearly a month now amid growing recession fears. “In the very short term, UVXY does very well when the market is surprised and reacts bearishly,” Daniel Martins, principal researcher and portfolio strategist at DM Martins Research, told CNBC Pro. He noted that UVXY increased by 900% in just one month between February and March 2020 at the start of the Covid-19 pandemic. “It’s the potential for very quick and big gains when everyone in the market seems to be losing their shirt that I think is the appeal of this fund,” Martins added. But he cautioned that ETFs aren’t for everyone. Read more What next for falling yen as Japan hints at intervention? What are the professionals here saying Apple or Samsung? Tech investor Paul Meeks reveals which tech giant he will buy Morgan Stanley says the S&P 500 is poised for a year-end rebound. Here is his top stock pick “If I define investors as market participants who buy and hold their positions for at least a few weeks or months, I don’t think investors should get involved in UVXY. I think it is more suitable for traders. which can monitor price action daily, or even hourly,” added Martins. “My advice to those choosing to buy shares of the fund is: 1. Keep the bet on a leash and have a clear idea of when you need to exit the trade. and 2. Appropriately size the position in 10 allocations.% or more (maybe 5%) seems too aggressive for my taste.He explained that the risks of betting on UVXY are “significant”, given that price movements in UVXY tend to be large, d “especially since it is multiplied by a factor of 1.5. This means that an investor could potentially lose $1.50 for every $1 invested if the investment goes wrong.” these rare spikes with precision, which I find almost impossible,” he warned. even is up around 50% over the same period. It has fared less well in the long term, which shows why the instrument is best suited as a short-term transaction. “Over the past five years, despite increased volatility due to the Covid-19 crisis, UVXY has declined cumulatively by 99%. The bottom line is – history tells me that, given enough time, he has a great chance. UVXY will be a value destroyer, not a value creator,” Martins said. For market participants who are averse to such high risk and have a long-term investment horizon, Martins prefers the AGFiQ US Market Neutral Anti-Beta (BTAL) ETF – an “under the radar” fund that bets on stocks that hedge against high risks. Hold or store higher beta stocks. “When volatility rises due to a bearish tone in the market, low beta stocks take advantage and capture the BTAL which splits between risky and risky plays. ETFs have the very important advantage of not consistently provide more negative returns, as is the case with UVXY,” he said. Eikon’s data showed BTAL is up nearly 10% this year — a “respectable” performance in this year’s bear market, according to Martins.
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