Investor confidence improved slightly after Powell’s comments last Friday, prompting the S&P 500 to jump slightly. However, with U.S. debt at record levels and persistent inflation risks, systemic vulnerabilities remain a concern for investors.
A troubling combination of slow economic growth and persistent inflation levels underscores the growing uncertainty that investors are facing. This is mirrored by how the broad market index has performed in August.
After initially gaining 3.7% in the month, the broad market index lost momentum by the second week, declining about 1.5% through Aug. 21. Following this, the S&P 500 index rebounded, jumping about 1.7% as of Aug. 27.
Persistent Inflation Demands Caution
In addition to indicating a September interest rate cut, Powell also highlighted increased inflation concerns last Friday. According to Reuters, investors turned anxious about the possible risks of stagflation and the possibility of an overconfident market.
Stagflation is an economic condition marked by the combination of slowing growth, rising inflation and high unemployment occurring simultaneously.
According to Reuters, inflation expectations are rising, with consumers’ 12-month inflation expectations jumping to 4.9% in August from 4.5% in the previous month. The long-term expectations increased to 3.9% from 3.4%.
Other Factors Fueling Rising Market Volatility
Rising U.S. debt levels also weigh on market confidence, increasing the need to adopt a more cautious approach. Continued geopolitical instability further reinforces this view.
The market rally has been largely driven by the AI boom. However, following comments from OpenAI CEO Sam Altman about an AI bubble and with a growing number of investors believing that gains in the AI sector may have become overextended, investors are rotating out of major tech players.
This highlights the potential systemic vulnerabilities in the AI-driven market rally, which could prompt investors to overreact to even mildly negative news, triggering panic selling.
Why Should Investors Consider Volatility ETFs?
Increasing exposure to volatility ETFs in the short term can be a winning move for investors. Taking precautions up front is better than facing avoidable risks later. These funds have delivered short-term gains during periods of market chaos and may climb further if volatility endures.
Investors with a long-term horizon may be able to look past these near-term uncertainties, but those with a shorter horizon should exercise greater caution.
With the potential for increased volatility, adding these ETFs may be a smart strategic move (See: all Volatility ETFs here).
ETFs to Explore
Below, we highlight a few funds that investors can consider to gain increased exposure to volatility ETFs.
iPath Series B S&P 500 VIX Short-Term Futures ETN VXX
iPath Series B S&P 500 VIX Short-Term Futures ETN seeks to track the performance of the S&P 500 VIX Short-Term Futures Index Total Return and has amassed an asset base of $806.1 million. The index offers exposure to a daily rolling long position in the first and second month VIX futures contracts.
VXX charges an annual fee of 0.89% and has a one-month average trading volume of 6.67 million shares.
iPath Series B S&P 500 VIX Short-Term Futures ETN has lost 11.48% over the past month and 8.47% over the past year.
ProShares VIX Short-Term Futures ETF VIXY
ProShares VIX Short-Term Futures ETF seeks to track the performance of the S&P 500 VIX Short-Term Futures Index and has amassed an asset base of $331.9 million. The index measures the movements of a combination of VIX futures and is designed to track changes in the expectation for one month in the future.
The fund is ideal for investors looking to gain from an increase in expected volatility of the S&P 500. VIXY has a one-month average trading volume of 1.81 million shares.
ProShares VIX Short-Term Futures ETF has lost 11.56% over the past month and 9.82% over the past year. The fund charges an annual fee of 0.85%.
ProShares VIX Mid-Term Futures ETF VIXM
ProShares VIX Mid-Term Futures ETF seeks to track the performance of the S&P 500 VIX Mid-Term Futures Index and has amassed an asset base of $39.1 million. The index measures the movements of a combination of VIX futures and is designed to track changes in the expectation for VIX five months in the future.
The fund is ideal for investors looking to gain from an increase in expected volatility of the S&P 500. VIXM has a one-month average trading volume of about 150,000 shares.
ProShares VIX Mid-Term Futures ETF has lost 6.82% over the past three months but has gained 16.40% over the past year. The fund charges an annual fee of 0.85%.
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iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): ETF Research Reports ProShares VIX Short-Term Futures ETF (VIXY): ETF Research Reports ProShares VIX Mid-Term Futures ETF (VIXM): ETF Research ReportsThis article originally published on Zacks Investment Research (zacks.com).
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