ETFs to Hedge Election Risks Ahead

Markets ETF Trends

With the markets seeming rather calm, trading within a range bound level belies potential volatility of the U.S. presidential election season. Consequently, investors may consider strategies like exchange traded funds that track the CBOE Volatility Index to hedge the upcoming risks.

Continue Reading Below

Citigroup Inc. Head FX Strategist Steven Englander argued that while investors expect a degree of volatility around election day, people aren’t adequately hedging around the event, Bloomberg reports.

For instance, the CBOE Volatility Index, or so-called VIX, is hovering around the 13.3 level, or below its historical average range of between 15 to 20. The VIX is a widely observed indicator for investor sentiment in the stock market and measures the expected or implied volatility of large-cap stock options traded on the S&P 500 index.

“Investors will be surprised at how fast and far asset markets move on the news of a Trump or Clinton victory, and how little chance they have to profit from the news,” Englander told Bloomberg.

Englander attributes the current complacent attitudes to investors’ reluctance to “pay a premium in a year when returns are modest.” Consequently, investors’ complacency could set up markets for a volatile sell-off in the wake of a risk even, such as the U.S. election, when everyone reacts at once.

Continue Reading Below

SEE MORE: VIX, Volatility ETFs Reveal an Overly Complacent Market

“If everyone is positioning to pull the trigger on positioning as soon as they know the outcome, the repressed volatility may emerge in a very sharp burst,” Englander added. “The outcome would likely be that prices move much more quickly than expected with much less opportunity to get the position on than investors would like and some possibility that one-way markets lead to overshooting.”

Moreover, Citigroup expects heightened volatility over the course of the fourth quarter, citing risks like the Federal Reserve’s potential December interest rate hike, U.S. elections in November and growth in China.

Consequently, investors who are concerned about the potential risks ahead may consider 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) takes 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.

For more information on the CBOE Volatility Index, visit our VIX category.

This article was provided by our partners at ETFTrends.