ETF Periscope:VIX Near Year’s Low Makes It Cheap Insurance Against Volatility

“Knowledge is learning something new every day. Wisdom is letting go of something every day.” -- Zen Proverb

The market is currently in a nice little comfort zone, touching on record highs on a regular basis. In spite of that fact, it has more or less been in a sideways trend these last four weeks, which tends to beg the question: Is the market consolidating for a breakout or about to lose steam and head into reverse?

That remains to be see, though there are reasons to think that the low levels of volatility the market currently is registering will start to rise fairly soon.

But more on that in a moment.

Last week, all three of the major indices were in the positive, with the S&P 500 Index (SPX) up 1.1%, the Dow Jones Industrial Average (DJIA) gaining 0.6%, and the Nasdaq (COMP) nicely in the black to the tune of 2.1%.

Worth noting is that on Thursday, the Dow hit an all-time intraday high, while the Nasdaq ended on a thirteen-year high note. Not to be outdone, and probably of greater significance, the SPX hit 1,700, an all-time high for the benchmark index. It managed to hold, and slightly surpass that level as the trading week wrapped up on Friday.

But will 1,700 serve as support, or quickly morph into a heavy line of resistance?

Well, with a slew of Fed officials on hand this week to add their two cents on the “great taper” debate regarding the timing and degree of weaning the economy off the Fed’s $85 billion per-month asset purchase, the potential for some extreme market movement is certainly on tap.

Any surprises from out of the mouths of these officials would rock and roil the markets, of course, and SPX 1,700 could become a ceiling, not a floor.

More likely, however, is that any new statements made by the regional Fed presidents this coming week will be calibrated to reduce, rather than increase, investor angst.

Of greater concern to investors, or should be at least in the short term, is the potential for the severe market volatility that would result should any of last week’s reported terrorist threats actually get implemented.

Hopefully, of course, that won’t occur, but at the very least the fact that we always live just a shout away from some volatile geopolitical event should serve as a reminder to investors that one’s stock portfolio should always contain some form of hedge, whatever vehicle best suits one’s risk management needs. 

Regarding this, investors may care to note that market volatility levels, as represented by the Chicago Board Options Exchange Market Volatility Index (VIX) ended the week under 12, the lowest mark since March of this year.

These low VIX levels are indicative of investor sentiment, so investors are looking pretty complacent right now.

Whether this is warranted or not really doesn’t matter.

What does matter is that investors can take advantage of the low VIX levels currently in play by purchasing relatively inexpensive insurance against a dramatic downward move in the equity market.

Though the index itself can’t be directly traded, there are several ETFs that are based on the VIX and therefore serve to a certain degree as “volatility insurance.”

VXX (S&P 500 VIX Short-Term Futures ETN) is useful for this purpose. It tracks the S&P 500 VIX Short-Term Futures Index Total Return, and, as in the case of the VIX itself, VXX generally goes up as the market goes down, and vice versa.

What the Periscope Sees

The Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis. This week, same as last, finds the Technology Sector at the top of the SectorCast rankings, with an Outlook Score of 91. Next up is the Financial Sector, which is second, but not really that close with a score of 77. Coming in third for the week is the Consumer Goods Sector, scored at 60.

Here is the current list of some of the top-performing Technology Sector ETFs year-to-date, as of the final week of July:

FDN -- First Trust Dow Jones Internet Index Fund, +28.71%

SOXX -- iShares PHLX SOX Semiconductor Sector Index Fund, +26.33%

FXL -- First Trust Technology AlphaDEX Fund, +21.96%

SMH -- Market Vectors Semiconductor ETF, +20.11%

QTEC -- First Trust NASDAQ-100 Technology Sector Index Fund, +20.97%

IGV -- iShares S&P GSTI Software Index Fund, +17.93%

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.


ETF Periscope