Volatility ETFs Spike on Renewed Trump Tariff Threats

Market volatility spiked once again on renewed tariff threats from President Donald Trump. The volatility level represented by the CBOE Volatility Index, also known as the fear gauge, jumped 29.3% last week. This suggests that market worries have started to set in. This fear gauge tends to outperform when markets are declining or fear levels about the future are high. 

As such, iPath Series B S&P 500 VIX Short-Term Futures ETN VXX and ProShares VIX Short-Term Futures ETF VIXY jumped about 6% each, while the leveraged version — ProShares Ultra VIX Short-Term Futures ETF UVXY and 2x Long VIX Futures ETF UVIX gained 8.5% and 12%, respectively. These products have proven to be short-term winners in turbulent times and could move higher as long as market turmoil lingers.

Tariff Trigger

In a social media post on Friday, Trump threatened to impose a 50% tariff on EU goods, criticizing the 27-member bloc as “very difficult to deal with” on trade and claiming that negotiations were “going nowhere.” The tariffs were set to take effect on June 1. Additionally, Trump warned that all smartphones made outside the country, including Apple’s AAPL iPhone and Samsung devices, could soon face a 25% import tax if not manufactured in the United States.

However, Trump has delayed the tariffs on goods from the European Union from June 1 to July 9 to buy time for negotiations with the bloc on Sunday.

Yield Surge

Worries about a ballooning U.S. deficit pushed the 30-year Treasury yield to the highest since October 2023 last week. The lawmakers passed a bill that could significantly worsen the U.S. deficit. Further, Moody's downgraded the U.S. credit rating, citing escalating federal deficits and interest costs. This downgrade has raised investor concerns about the sustainability of U.S. fiscal policy, leading to higher yields as investors demand greater compensation for perceived increased risk (read: Moody's Downgrades U.S. Rating: What's Next for S&P 500 ETFs?).

The rise in long-term interest rates — a key benchmark for consumer loans — could strain an economy already burdened by Trump's recently implemented universal tariffs.

ETFs in Focus

iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)

iPath Series B S&P 500 VIX Short-Term Futures ETN focuses on the S&P 500 VIX Short-Term Futures Index, which provides access to equity market volatility through CBOE Volatility Index futures and 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 is popular and liquid with AUM of $358.4 million and an average daily volume of 5 million shares. It charges 89 bps in annual fees (read: ETF Winners During Market Swings Since Trump's Win).

ProShares VIX Short-Term Futures ETF (VIXY)

ProShares VIX Short-Term Futures ETF provides long exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration. ProShares VIX Short-Term Futures ETF has amassed $126.8 million in AUM and charges 85 bps in fees per year. It trades in a volume of 884,000 shares per day on average.

ProShares Ultra VIX Short-Term Futures ETF (UVXY) 

Investors seeking substantial gains in a short time frame may consider this leveraged volatility ETF. ProShares Ultra VIX Short-Term Futures ETF offers exposure to one and a half times (1.5X) the daily performance of the S&P 500 VIX Short-Term Futures Index. It has accumulated $466 million and charges 95 bps in annual fees. It trades in a volume of 13 million shares per day on average.

2x Long VIX Futures ETF (UVIX)

2x Long VIX Futures ETF seeks twice the performance of the Long VIX Futures Index, charging investors 1.77% in annual fees. The Index measures the daily performance of a theoretical portfolio of first and second-month VIX futures contracts that are rolled daily. UVIX has amassed $363.4 million in its asset base and trades in an average daily volume of 6 million shares (read: 5 Leveraged/Inverse ETFs That Gained More Than 25% in April).

Bottom Line

Investors should note that these products are suitable only for short-term traders. This is because, most of the time, the VIX futures market trades in a condition known as contango, a situation where the near-term futures are cheaper than the long-term futures contracts. As volatility ETFs and ETNs like VXX must roll from month to month in order to avoid delivery, the situation of contango can eat away returns over long periods (see: all the Volatility ETFs here).

However, given the current market conditions, now seems to be a good time to add these products to your portfolio. 

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This article originally published on Zacks Investment Research (zacks.com).

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