Volatility reared its head again last week, with US stocks posting their worst week since June as traders responded to growth fears, tepid inflation data and the possibility of ‘a rate hike of 100 basis points by the Federal Reserve. It marked Wall Street’s fourth losing week in five, highlighting the fragile state of the stock market. But as stock markets tumbled, one exchange-traded fund in particular outperformed: the ProShares Ultra VIX Short-Term Futures ETF ( UVXY ), which rose more than 13% last week. In contrast, the S&P 500 fell about 5%. UVXY is an inverse volatility ETF with a track record of outperforming during times of extreme market volatility. Its recent rise came amid a surge in the CBOE Volatility Index (VIX), widely known as Wall Street’s fear gauge, which traded at 27.27 at one point last week , at a distance close to the 30 mark which usually indicates high volatility. It has been steadily rising above the 20 level for almost a month now, amid growing recession concerns. “In the very short term, the UVXY does very well when the market is caught by surprise and reacts in a bearish way,” Daniel Martins, principal researcher and portfolio strategist at DM Martins Research, told CNBC Pro. He noted that UVXY had risen 900% in just one month between February and March 2020 at the start of the Covid-19 pandemic. “It’s probably the prospect of very quick, big gains when everyone else in the market seems to be losing their shirts that I think is attractive about this fund,” Martins added. But he cautioned that the ETF is not for everyone. Read More What’s Next for the Sinking Yen as Japan Hints at Intervention? Is this what Apple or Samsung professionals say? Tech investor Paul Meeks reveals which tech giant would buy Morgan Stanley says the S&P 500 is poised for a year-end comeback. Here are his top stock picks “If I define investors as market participants who buy and hold their positions for at least a few weeks or months, I don’t think investors should get involved with the UVXY. I think it’s better suited for traders who can afford to watch price action on a daily, if not hourly, basis,” added Martins. “My advice to those choosing to buy shares in the fund is to: 1. Keep the bet on a short leash and have a clear idea of when to exit the trade. And 2. Size the position appropriately, such as an allocation of 10 . % or more (maybe even 5%) seems too aggressive for my taste.” He explained that the risks of betting on the UVXY are “substantial”, given that the price movements in the UVXY are usually considerable, especially since it is leveraged by a factor of 1.5x. This means that an investor could lose $1.50 for every $1 invested if the investment goes wrong. “Also, the challenge is timing these rare spikes precisely, which I think is almost impossible,” he warned. A safer bet UVXY is down about 16% for the year, even though the VIX itself is up nearly 50% over the same period. It has fared even worse over the long term, which highlights why the instrument is best suited as a short-term trade. “Over the past five years, despite the increased volatility caused by the Covid-19 crisis, UVXY is down a cumulative 99%. The bottom line is that history tells me that, given enough time, there is more chances are UVXY will be a value destroyer, not a value creator,” Martins said. For market participants who are averse to such high risk and have a longer investment horizon, Martins likes the AGFiQ US Market Neutral Anti-Beta ETF (BTAL): an “under the radar” fund which bets on defensive actions against a higher risk. or higher beta stocks. “When volatility rises due to a bearish tone in the market, low-beta stocks tend to benefit, and BTAL captures that spread across risk-on plays. The ETF has the very important advantage of not consistently produce large negative returns over time, as is the case with UVXY,” he said. Eikon data showed BTAL is up nearly 10% this year, a “respectable” performance in this year’s bear market, according to Martins.
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