Avoid These Volatility ETFs/ETNs

Before you go, we thought you'd like these...
Before you go close icon

Editor's note: This article is a stock pitch made by a member on CAPS, The Motley Fool's free investing community. The pitch is published UNEDITED and is the opinion of the CAPS member whose pitch it is, in this case:bbmaven.

Each week, Motley Fool editors cull a top stock idea from the pitches made on CAPS, The Motley Fool's 180,000-member free investing community. Want your idea considered for this series? Make a compelling pitch on CAPS with a minimum length of 400 words. Want to follow our weekly picks? Subscribe to our RSS feed or follow us on Twitter.

Stocks

VelocityShares Daily 2x VIX Short Term ETN (NYS: TVIX)

iPath S&P 500 VIX Short-Term Futures ETN (NYS: VXX)

ProShares Ultra VIX Short-Term Futures ETF (NYS: UVXY)

Submitted By:bbmaven
Member Rating:100.00
Submitted On:7/13/2012

Profile

Star Rating*
ETP TypeVolatility

Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:

The volatility ETF's or ETN's (TVIX, TVIZ, VXX, UVXY, CVOL, VZZB and some others) are based on VIX futures - some short term, some longer term. When volatility is high, they will spike. However, that averages around 10% of the time over the course of a year. When volatility is low, it costs the funds a great deal to continue to roll both the short term and longer term futures. When the longer term futures reflect more volatility than the shorter term futures (which is true about 90% of the time), resulting phenomenon is called contango - UVXY will go down even if the vix stays static. The reverse is called backwardation - but is usually short lived.

In essence, each of these as long term investments are horrible - they WILL go to zero eventually. In fact, they are designed to do so. They are the safest short on the planet except for one thing - when the spikes occur, it is tough to maintain the shorts as the shares become extremely difficult to borrow. If one is over allocated, the margin requirements become severe. And there is a good chance that one's short can get closed out at the worst possible time.

Foolish bottom line
While this CAPS All-Star thinks you should avoid these ETPs, for some ETFs you don't have to avoid check out our brand-new free report on "3 ETFs Set to Soar."

The article Avoid These Volatility ETFs/ETNs originally appeared on Fool.com.

The Motley Fool is investors writing for investors.Dan Dzombakhad no position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words.Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners