How To Harness Market Volatility With ETNs

Volatility is a common fiend to stock market and exchange traded fund (ETF) investors alike, however, there are ways to harness this energy in your favor. This is especially true now that’s it’s become the rule rather than the exception lately.

As the stock market is trending down these days, there are indexes that track volatility that are up, and two new exchange traded notes began trading last month that help track this movement. Jia Lynn Yang for CNN Money reports that on Jan. 30, Barclays (BCS) launched ETNs designed to track the Chicago Board Options Exchange Volatility Index, or VIX (^VIX).

The VIX, which has received more attention than usual in the last year, gauges investor sentiment. High levels of market fear is reflected in a higher VIX.

These new tools allow investors to buy or sell the implied volatility of the S&P 500 (^GSPC).

Trading in volatility is short-term, with credit risk attached to the notes, and the indexes these notes follow are volatile themselves; that said, the issues factored in, trading volatility by using these new ETNs probably makes more sense for sophisticated professional investors and traders than for small buy-and-hold investors.  They are definitely meant to be short-term trading vehicles.

That’s not necessarily bad, but if you’re an investor it’s not something you can buy and tuck into your portfolio and forget about, either. The ETNs are:

• iPath S&P 500 VIX Short-Term Futures ETN (VXX)
• iPath S&P 500 VIX Mid-Term Futures ETN (VXZ)

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