With the stock market churning at a potential top, economic uncertainty in both Europe and the US as well as the historically worst performing month (September) for the stock market coming up, investors should be looking for ways to hedge their equity exposure or position themselves for a potential market decline.
Well there is a new ETF that was introduced less than a year ago called the Velocity Shares Daily 2X VIX Short Term ETN (TVIX), that was created to replicate twice or 2X the return of the S&P 500 VIX Short Term Futures Index. TVIX holds and rolls over short term $VIX futures contracts based on the S&P 500 Volatility Index.
Everyone knows the VIX or Volatility Index, acts as a fear index for investors, basically when investors perceive there is risk in the market, the $VIX and TVIX will go up, when risk or uncertainty is quiet the VIX will go down.
This is one of the reasons why TVIX is only apporpriate for short term trading, it is not a buy and hold ETF, due to the fact that it has a high expense ratio of 1.65% and a negative roll yield, (which basically punishes investors when TVIX rolls over to the next futures contract (since the structure of $VIX futures is always in Contango, and the fund has to pay a higher price every month it buys a new contract).
That being said the TVIX is still the best ETF that I have found to profit off a market decline here is why:
1) Risk to Reward– unlike short leveraged ETFs the TVIX can profit in both a sideways market as well as a decling market because it is a play on perceived volatility, and if investors think risk or volatility is imminent the VIX index and the TVIX will go up.
2) Liquidity and no margin accout needed– TVIX can be purchased in any account, you do not need a special margin account like you do to be able to short stocks or buy options. Secondly TVIX has been seeing record trading volume recently and justtraded over a million shares a day, therefore giving investors a low spread- low cost way to play a market decline.
3) Home Run Potential– This is the most intriguing element of TVIX, remember it is a leveraged ETF, in that it should return close to 2X or 200% of the return of the VIX index. The VIX index is wildy volatile and on many occasion has jumped 100% or more less than a month’s time.
For example In March of this year during the Japanese Earthquake the VIX went from $16 to $31 in less than 3 weeks, an almost 100% return, while TVIX went from $34 to $64 during the same period an 88% return.
Now when things get really bad such as the credit crisis of 2008, the $VIX really blasts off. During the main months of the Lehman Bankruptcy and credit crisis (September 2008 to December 2008) the VIX rocketed from nearly $20 to $80, a 300% return in three months, and since TVIX tracks the $VIX index almost step for step you could have acheived these similar returns by buying and holding the TVIX during that same period.
So the next time you are looking for an investment vehicle to profit off a potential market decline, look no further than the Velocity Shares Daily 2X VIX Short Term ETN (TVIX), it wil not only profit in more market conditions than short only ETFs but it also will give you the biggest bang for your buck, since I know of no other ETF or ETN that has returned almsot 100% or more in a short time period during market declines.
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