Advisors in Focus- February 1, 2021

Just like that, we are into the second month of 2021. Perhaps it is the monotony of the day-to-day that is leading to time passing surprisingly fast. The market though has been anything but monotonous the past couple of sessions. The retail crowd has been making waves, leading to volatility in high short interest names. The retail crowd must have been going through the annals of market activity and come across the Hunt Brothers attempt to corner the silver market in 1979 as the metal, and the companies who mine it, are seeing buyers flood into holdings.

  • Trivia Question- Does the CBOE VIX measure historical U.S. equity market risk or does it measure what is expected by experts in the near term? (Answer below)

Questions will remain about the overall impact from this new wave of day traders who have shown astuteness by going after themes such as short-selling. These players are also using complex derivatives like options to leverage their impact. Daily Options have more than doubled since 2019. Deutsche Bank noted that small buyers account for twice as much of the options volume as the big and midsize players. This leverage helps increase the volatility which is further complicated by sellers of these options being forced to buy shares in order to hedge.

The VIX has certainly been impacted by the recent uptick in activity. The Volatility Index jumped from 22 to 37 last week as investors scrambled to find protection as market participants were trying to figure out what the broader implication from these stock moves meant. With that in mind, we thought it would be important to shine our ETF Spotlight on some of the volatility ETFs that are garnering interest among your peers looking for some protection against uncertainty.

TrackStarIQ Data

1SPDR S&P 500 ETFSPYVanEck Vectors Gold Miners ETFGDXVXXSMLV
3VanEck Vectors Gold Miners ETFGDXProShares Ultra VIX Short-Term FuturesUVXYVIXMSPLV
4ProShares Ultra VIX Short-Term FuturesUVXYInvesco QQQQQQ XMLV
5ARK Innovation ETFARKKiShares Russell 2000 ETFIWM LVHD
6ARK Genomic Revolution ETFARKGVanguard Growth ETFVUG
7iShares Silver TrustSLViShares MSCI Emerging Markets ETFEEM
8iShares Russell 2000 ETFIWMVanguard S&P 500 ETFVOO
9VanEck Vectors Semiconductor ETFSMHiShares Core S&P Mid-Cap ETFIJH
10ARK Web x.0 ETFARKWFinancial Select Sector SPDR FundXLF
11Invesco Solar ETFTANVanguard Mid-Cap Index ETFVO
12SPDR Gold TrustGLDGlobal X Silver Miners ETFSIL
13iPath Series B S&P 500 VIX Short-Term Futures ETNVXXiShares Global Clean Energy ETFICLN
14Energy Select Sector SPDR FundXLEiShares iBonds Dec 2023 Corporate ETFIBDO
15SPDR S&P Retail ETFXRTSPDR S&P Regional Banking ETFKRE
16ProShares UltraPro Short QQQSQQQVanguard FTSE Emerging Markets ETFVWO
17First Trust Nasdaq Artificial Intelligence and Robotics ETFROBTProShares Ultra Bloomberg Natural GasBOIL
18ARK Fintech Innovation ETFARKFVanguard Dividend Appreciation ETFVIG
19Invesco WilderHill Clean Energy ETFPBWInvesco DB US Dollar Index Bullish FundUUP
20Direxion Daily Small Cap Bear 3X SharesTZADirexion Daily Financial Bull 3X SharesFAS
  • iPath S&P 500 VIX Short-term (VXX)- The goal of this ETF is to offer investors a way to access equity market volatility. It is one of the largest and most liquid ETNs. The VXX is linked to an index composed of VIX futures. The focus is on more short-dated (1-month average terms) futures, which makes this instrument better for day traders and those looking for shorter term volatility. It has a higher Expense Ratio at 0.89% but it is difficult to find protection elsewhere. It is a great tool for tactical exposure but there is increased risk from the potential of contango in futures positions.
  • ProShares VIX Short-term (VIXY)- This tracks an index of futures contracts with a 1-month average maturity. This is another tactical position that allows for traders to protect against increased volatility over the short-term. VIXY has the cheapest Expense Ratio (0.87%), has the most Assets Under Management ($407 mln), the most liquid with Average Daily Volume at 6 million and has had the best year-to-date performance (25.9%) in the group.
  • VIX Mid-term Futures (VIXM)- This tracks an index of futures contracts on the VIX with an average of 5 months until maturity. This provides buyers some protection against stock market volatility over a longer period than VXX and VIXY. There are questions about how well it tracks the VIX pattern which has raised questions about its validity. One important aspect for Financial Advisors is that this is structured as a commodity pool so it avoids counterparty risk and delivers a K-1 at tax time. Its Expense Ratio is 0.87% which is in line with peers. It does have less liquidity as it has $90 mln in Assets Under Management and an Average Daily $ Volume of $2.65 mln.
  • SPDR U.S. Small Cap Volatility (SMLV)- This is an ETF that tracks small cap stocks carrying lower volatility. It is designed to track low beta names which will lag in returns when times are good, but provide more stability for longer term investors. Financials make up 46% of this portfolio followed by Consumer Cyclicals at 14%. Its Expense Ratio is miniscule at 0.12%. Making this even more attractive is the Dividend Yield which sits at 3.41%. It does not offer a tremendous amount of liquidity as it has an Average Daily $ Volume of $864K.
  • Invesco S&P 500 High Dividend, Low Volatility (SPHD)- This tracks a dividend-yield-weighted index of stocks. It limits its holdings to 50 names in order to find companies that fit its needs. Financials make up 19% of the ETF followed by Utilities (16%), Basic Materials (13%) and Technology (12%). This is another manageable Expense Ratio at 0.30%. It also offers more liquidity than SMLV as it has an Average Daily $ Volume of $32.26 million.

Trivia Answer- The VIX measures what experts expect for risk in the future. The index evaluates the options being bought and sold and what investors are willing to pay for different levels of volatility protection.

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