Avoid These Volatility ETFs/ETNs

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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)

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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.

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