The S&P 500 fell 2.9% last Friday, following President Trump’s social media post, warning of higher tariffs on Chinese goods, reviving trade war anxieties. According to data from FactSet, as quoted on CNN, the broad market index’s decline cost the market $1.56 trillion in a single session.
Markets reacted sharply to the President's post, raising the CBOE Volatility Index (VIX) 32% to its highest level since June, per the CNN article.
Apart from AI bubble concerns, worries about U.S. asset prices being overvalued, persistent economic concerns, a complicated geopolitical environment, the threat of escalating trade conflicts, ongoing risks to financial stability and systemic vulnerabilities have been alarming for investors.
Will the AI Hype Hit a Wall?
Wall Street has long been wary about a potential bubble in the AI sector. The Bank of England and the IMF, as quoted on CNBC, joined the growing chorus, warning that global markets may stumble if the AI boom loses momentum. Per IMF chief Kristalina Georgieva, according to the CNBC article, U.S. tariffs and sky-high stock valuations are other warning signs.
Per Goldman Sachs CEO David Soloman, as quoted on CNBC, stock markets may experience a pullback over the next year or two, following years of record highs fueled by the AI frenzy. As quoted in the CNBC article, Amazon’s CEO Jeff Bezos shares the same concerns, describing AI as being in an “industrial bubble.”
The S&P 500 is increasingly shaped by the performance of the Big Techs. With around 35% of the S&P 500 allocated to information technology, U.S. market investors face elevated concentration risks. If the AI-driven stock market bubble bursts, heavily tech-reliant investor portfolios may suffer significant losses.
Is Market Correction Imminent?
According to CNN, JPMorgan Chase CEO Jamie Dimon warned of an elevated risk of a significant U.S. stock market correction over the next six months to two years, noting that geopolitical tensions and rising government debt burdens add to market uncertainty.
Additionally, Fed Chair Jerome Powell cautioned in late September that the stock market appears overvalued, as quoted in the above-mentioned CNN article.
Per G20’s Financial Stability Board Chair, Andrew Bailey, soaring global asset prices have left markets exposed to a potential crash amid economic and geopolitical uncertainty, as quoted on Reuters. Bailey also highlighted the continued rise in sovereign debt, noting that vulnerabilities in the financial system remain elevated.
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 continues.
Investors with a long-term horizon may be able to look past these near-term uncertainties, but in the current economic environment, volatility-focused funds and strategies are ideal for reassessing volatility exposure for investors with a short-term horizon.
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. The index offers exposure to a daily rolling long position in the first and second-month VIX futures contracts.
iPath Series B S&P 500 VIX Short-Term Futures ETN charges an annual fee of 0.89%.
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, which measures the movements of a combination of VIX futures and is designed to track changes in the expectation for one month in the future.
ProShares VIX Short-Term Futures ETF is ideal for investors looking to gain from an increase in expected volatility of the S&P 500. 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, which 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.
ProShares VIX Mid-Term Futures ETF is ideal for investors looking to gain from an increase in expected volatility of the S&P 500. 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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