VXX.US ETF: hedge against the next market sell-off

The current levels of VIX are close to their historically low levels from last year. This allows for a cheap hedge of a portfolio of US stocks. This is particularly attractive given that the current VIX, the S & P500 volatility index, is close to the bottom of 10.17 on August 9, 2018.

In times of mass sell-off, the volatility of markets jumps. Hedging with gold or bonds is not always successful and does not offer the same protection for the portfolio. This February, for example, VIX exploded from historically low levels (below 10) and the S & P500 sank by nearly 13% in one week. During this period, we also saw a strong sell-off in US bonds. In other words, in a period like February, hedging with T-Bonds/T-bills would result in additional losses.

The same applies to gold. In the last few months USD is the most preferred safe haven currency by investors. This means that in times of volatility, depending on the source of volatility, gold may also be sold out.

We believe that VIX offers the easiest and most direct way to hedge the investor's portfolio as it directly protects the investor in times of mass sale.

The easiest way for VIX to be traded by a retail trader is through ETFs that buy futures.

VXX.US (ETF)

Daily chart

The VXX ETF is close to the volatility bottom this January, just before the volatility explosion. In most cases, volatility can not be used for speculation and profit. As 2017 showed, the volatility of the markets may be extremely low for an extremely long time. It is unlikely, contrary to the expectations of analysts, to return to a period of extremely low volatility.

We think, however, that the future for the markets is at times more volatile than what has been seen lately. Several factors will serve this purpose.

1. The Federal Reserve removes market liquidity by terminating QE (quantitative easing). This means increased volatility in both the bond market and the US stock market.
2.  Investor sentiment is much more cautious now than in 2017. The combination of trade conflict, collapses in emerging markets, and downturns in the technology sector make investors much more cautious.
   All this means that in the next mass sale, potential buyers will be less. This is especially true now that 90% of the US stock market's volume is traded by robots and algorithms:

Trading in the Age of Algorithms

Chart: CBOE