U.S. Election Angst Amps Up Market Volatility

The markets are notoriously wary of uncertainty, and political risk following the FBI's renewed probe into Hillary Clinton's emails has sparked growing concern over a potential Donald Trump presidency. Nevertheless, traders are hedging against the murkier outlook with exchange traded products that track the CBOE Volatility Index, or VIX.

Since FBI Director James Comey informed Congress that the bureau is looking into new evidence relevant to Clinton's case on October 28, the S&P 500 has declined 2.0%, posting its longest losing streak since 2008, and the VIX surged over 40% to 22.08 as of Thursday.

Political risk is revealing its ugly head this election cycle as sentiment quickly shifts for an easy Clinton win. U.S. equities have weakened while volatility spiked after election polls showed Democrat Hillary Clinton's lead over Republican Donald Trump has narrowed over the past few days after the FBI's renewed probe into an unauthorized e-mail server weighed on Clinton's odds of a victory come election day on November 8.

Up until a week ago, many market observers priced in a Hillary win, but the recent uncertainty reflects that the race may be tighter than we previously thought. Looking at the VIX, traders are increasingly worried about a Donald Trump win and the uncertain outlook of a Trump administration.

USA-ELECTION/DEBATE

Since October 28, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) increased 13.3%, ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) advanced 13.3%, VelocityShares Daily Long VIX Short-Term ETN (NYSEArca: VIIX) gained 14.0% and REX VolMAXX Long VIX Weekly Futures Strategy ETF (BATS: VMAX) jumped 16.0%.

The VIX, or so-called fear index, 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. ETPs that track VIX futures allow investors to profit during rising volatility or hedge against short-term turns. VIX exchange traded products track the VIX futures market, not the VIX spot price.

VXX is the most popular volatility-related ETP play, with $1.9 billion in assets under management and an average daily volume of around 23.2 million shares. The iPath S&P 500 Vix Short-Term Futures ETN tracks the S&P 500 VIX Short-Term Futures Index, which is comprised of first and second month VIX futures contracts. Current holdings include 54.6% of CBOE VIX Future Dec and 45.4% of CBOE VIX Future NOV 16.

Potential investors should note that VXX and VIIX are exchange traded notes and are not ETFs. An ETN is an unsubsidized debt security issued by an underwriting bank, which may leave investors open to default risks. With an ETN, an investor can lose some of all of their investment if the ETN issuer goes bankrupt. On the other hand, the ETN structure does offer advantageous tax treatment.

Similarly, VIIX and VIXY also tracks the S&P 500 VIX Short-Term Futures Index. VIIX holds 55% CBOE Short-Term VIX Future Dec 2016 contracts and 45% CBOE Short-Term VIX Future Nov 2016. VIXY currently holds a large position in CBOE VIX Future 12/21/2016 contracts and a smaller position in CBOE VIX Future 11/16/2016 contracts.

VMAX, though, differs from the other two volatility options as this ETF has a targeted average time to expiration of less than 30 days by accessing VIX weekly futures, whereas the other three ETPs hold monthly contracts. Since the sensitivity to the VIX spot price declines with longer-dated VIX contracts, VMAX may offer more sensitive exposure to VIX Index changes, which is reflected in its recent outperformance to the other VIX ETPs.

However, potential investors should be aware that VMAX only has $4.7 million in assets under management and lower activity, so potential traders should utilize limit orders to better control trades.

This article was provided by our partners at etftrends.com.