Home' Trinidad and Tobago Guardian : August 11th 2016 Contents BG16 STOCKS
BUSINESS GUARDIAN www.guardian.co.tt AUGUST 11 • 2016
For some investments, the
sound of crashing stock
prices and panic in the mar-
ket is actually the sweetest
melody. These investments
tie themselves to the VIX
index, a measure that traders call the stock
market s "fear gauge," and they ve been in
higher demand as markets have become
bumpier. Investors poured more than US$2
billion into volatility funds during the first
half of the year, triple the amount they
did 12 months earlier, according to Morn-
ingstar. But before joining the tide, it s
important to know that these kinds of
funds aren t for everyone, and they re cer-
tainly not leave-it-alone, long-term hold-
"Unfortunately, most of those are not
well suited to retail traders," says Randy
Frederick, managing director of trading
and derivatives at Charles Schwab. "I see
a lot of people wasting their money buying
volatility-related products to try to catch
that next big spike in volatility."
Frederick says many investors enter these
kinds of funds with the wrong expecta-
tions, and the wrong idea about how to
use them. For one, don t expect a VIX
fund to move just like the VIX. And don t
expect to be rewarded for buying one and
patiently holding it.
The VIX is called the "fear index"
because it shows how much traders are
worrying about big swings hitting the S&P
500 in the next month. It does that by
looking at how much traders are paying
for options on the S&P 500, which they
use to shield themselves if they re antic-
ipating more volatility.
The VIX tends to surge when stocks
drop sharply, something that s been occur-
ring more frequently due to the weak global
economy and a long list of other concerns.
The S&P 500 has dropped two per cent
in a day nine times over the last 12 months.
It had just two such days in the 12 months
On June 24, for example, the VIX spiked
nearly 50 percent after stocks tumbled on
the United Kingdom s vote to leave the
European Union. So, wouldn t it be great
to own something that rises with the VIX,
if not to profit from schadenfreude then
to help offset losses in the stock portion
of a portfolio?
But volatility funds don t track the VIX,
which is not an investable index. Instead,
they re often investing in the VIX futures
market, where traders bet on where the
VIX will be in coming months.
That means volatility funds often don t
move as much as the VIX itself. The
ProShares VIX Short-Term Futures
exchange-traded fund, for example, rose
on June 24, but by only about half as much
as the VIX.
To get closer to the VIX s performance,
some funds use leverage to boost their
returns. ProShares Ultra VIX Short-Term
Futures ETF, for example, tries to give
double the daily change of its underlying
index, and it jumped 44 percent on June
24.It s these kinds of short-term pops that
investors should be looking for. Investors
in the fund, which trades under the symbol
UVXY, are holding it for a week or less,
on average, says Joanne Hill, head of insti-
tutional investment strategy at ProShares.
They aren t planning to hold UVXY for
the long term: The fund is down 99.999
per cent over the last five years.
"When people decide to use these,
they re not looking at this five-year chart
of how they ve performed," Hill says.
"They re looking at the fact that last
August, when the VIX moved up 135 per
cent, UVXY moved up" 159 per cent.
One reason for the poor long-term per-
formance is the way prices work in the
VIX futures market. Contracts for far-off
months are generally more expensive than
for close-in months. And the fund is reg-
ularly selling close-in contracts and replac-
ing them with farther-off contracts.
Hill says dollars tend to pour into funds
like UVXY when the market is calm, an
indication that traders are trying to buy
low in anticipation of an uptick in volatility.
She says selling is highest when volatility
"The appeal of getting volatility exposure
is the same reason we buy insurance for
our house," Hill says.
Volatility funds piqued the curiosity of
Brian Jacobsen, who is chief portfolio
strategist at Wells Fargo Funds Manage-
ment, a couple of years ago. He bought
one of the more complex ones he could
find, "just to see what it was like."
"I rode it for about a week, and I threw
in the towel because it was doing nothing
like what I was expecting," he says.
Does he remember which fund it was?
"I don t," he says. "I try to block it out."
STAN CHOE, AP Business Writer
Yields for municipal bonds crept upward last week
after an encouraging report on the job market drove
Treasury yields higher.
Muni yields tend to move in the same direction
as Treasurys, and the 10-year Treasury s yield had
its biggest gain since February after a report showed
that employers hired more workers last month than
The 10-year yield on the AP Municipal Bond index
rose to 1.778 per cent Friday from 1.759 per cent a
week earlier. It has been holding steady in a narrow
range since mid-July, meandering between 1.75 per
cent and 1.80 per cent. The 30-year yield rose to
2.346 per cent from 2.301 per cent.
Higher yields mean investors buying muni bonds
today are getting a bit more in interest payments.
But it also means that investors who already own
them are seeing a dip in prices. That s because a
bond s yield and its price move in opposite directions.
The largest municipal-bond exchange-traded fund,
iShares National Muni Bond ETF, slipped 0.5 per
cent over the week.
Among other trends
shaping the municipal market:
Spotlight on Puerto Rico
As if Puerto Rico needed any more trouble. The
island already failed to make a payment on its gen-
eral-obligation bonds in July, the culmination of a
decade of economic struggles and rising debt. Now,
worries about the Zika virus could make things even
Puerto Rico has had nearly 5,500 reported cases
of Zika, according to the Centres for Disease Control
and Prevention. That s triple the number in the 50
The spread of Zika will likely keep some tourists
away from the island, and tourism has been one of
the few industries to add workers there recently. It
could also push more Puerto Rican residents to leave
for the US mainland, accelerating a yearslong migra-
tion. That would mean even fewer taxpayers for a
government that needs more revenue.
Credit-rating agencies already rate Puerto Rico as
below investment grade. The spike in Zika cases only
puts further pressure downward on its credit strength,
Moody s vice president Emily Raimes wrote in a
Mind the gap
Municipal bonds that take longer to mature are
riskier for investors to hold, but they re paying more
than they used to over their short-term rivals.
Municipal bonds maturing in 10 years are offering
1.16 percentage points more in yield than those matur-
ing in two years, according to the AP Municipal Bond
index. That gap has been steadily widening over the
last month after being as narrow as 0.946 percentage
points in the first week of July. AP
week in review:
Yields creep higher
Fear in the stock
market can mean profit,
but know the risks
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