Speaking of trading intangibles — should the mood strike, you can even trade fear.
The Chicago Board Options Exchange Market Volatility Index (or, more commonly, the VIX), gauges the expectation of expected future stock market volatility — any movement, good or bad — by weighing options prices on the S&P 500. And because investors traditionally hate volatility, it picked up the “fear index” moniker.
In short, when news gets investors to fret — think eurozone debt or a Chinese slowdown — you can bet the VIX is climbing.
Click to Enlarge VelocityShares has a pair of funds that not only allow you to play the VIX, but double down on it — the Daily 2x VIX Short-Term ETN (NYSE:TVIX) and Daily 2x VIX Medium-Term ETN (NYSE:TVIZ), also costing 1.65%. Like the names imply, they are tied to short-term (one-month average) and mid-term (five-month average) options and essentially are bets on how crazy you think the market will be. As you can see in the chart, these funds gained strongly during the volatile fall of 2011, but have tapered off significantly during the market’s reasonably smooth rally in 2012.
Again, you’re getting what you pay for — 1.65% is about as costly as it gets, but you’re buying the right to make leveraged bets on fear.
The AdvisorShares Active Bear ETF (NYSE:HDGE) is, as the name implies, an actively managed ETF that makes its money by shorting stocks. It’s also the priciest ETF on the market, at a 1.85% expense ratio. For that pound of flesh, management will pore through the markets, seeking out companies that have weak earnings, accounting problems or other red flags, then bet against the house.
Click to Enlarge But unlike the previously mentioned funds, this expense ratio is hard to justify. Because HDGE is actively managed, it’s not tethered to any index. But a look at this chart shows HDGE more or less acts to the inverse of the S&P 500 — and if you simply want to bet against the market, there’s a number of cheaper avenues to pursue.
For instance, the ProShares Short S&P 500 (NYSE:SH), which makes its money when the S&P 500 dives, comes at half the price, with a 0.9% expense ratio. The ProShares Short Dow 30 (NYSE:DOG) works similarly, but with the Dow, at 0.95%. Since HDGE’s inception early last year, all three have been losers — but HDGE, down 18%, cost the most and lost the most.