The latest exchange of strikes between Iran and Israel served as a reminder that geopolitical tensions in the Middle East remain far from resolved. The incident highlighted the fragile nature of the ceasefire between Washington and Tehran, raising doubts about the durability of recent diplomatic progress.
Ironically, the ceasefire has now lasted longer than the conflict itself, yet the prospects for a lasting resolution remain uncertain. Renewed tensions in the region have reinforced expectations that a comprehensive agreement between Washington and Tehran is unlikely to materialize anytime soon, keeping geopolitical risks elevated and uncertainty firmly on investors' radar.
Moreover, recent weakness in the technology sector suggests that market volatility extends beyond geopolitical concerns surrounding Washington and Tehran. The tech-heavy Nasdaq Composite has fallen roughly 4.7% over the past five trading sessions and 0.66% over the past month, indicating that investors may be looking to reduce exposure to some of the market's most crowded AI-related trades and that the AI-driven rally has largely remained narrow.
Even though the long-term outlook for artificial intelligence remains intact, investors are looking to rotate out of the AI trade and rotate capital toward more defensive sectors. This highlights that the risk of concentrated rallies in select names makes the market vulnerable to larger drawdowns, making investing in volatility ETFs a tactical hedge.
Why Should Investors Consider Volatility ETFs
With geopolitical tensions and evolving macroeconomic risks continuing to influence investor sentiment, volatility ETFs are emerging as a compelling tool for managing near-term risks. Beyond serving as a hedge against potential market drawdowns, these funds can also benefit from periods of elevated uncertainty and rising volatility.
When it comes to risk management, anticipating risk is often more effective than reacting after losses have already materialized. Volatility ETFs tend to work best when used proactively rather than emotionally, allowing investors to position ahead of potential market stress instead of chasing protection after volatility has already surged.
Historically, volatility ETFs have performed well during episodes of heightened market stress, making them a useful complement to traditional portfolio allocations when risks remain elevated and the outlook is uncertain. With the potential for increased volatility, adding these ETFs may be a smart strategic move (See: all Volatility ETFs here).
Volatility ETFs for Navigating Risks
Below, we have highlighted a few funds that investors can consider to gain increased exposure to volatility ETFs.
iPath Series B S&P 500 VIX Short-Term Futures ETN VXX
iPath Series B S&P 500 VIX Short-Term Futures ETN seeks to track the performance of the S&P 500 VIX Short-Term Futures Index Total Return. The index offers exposure to a daily rolling long position in the first and second-month VIX futures contracts. iPath Series B S&P 500 VIX Short-Term Futures ETN charges an annual fee of 0.89%.
ProShares VIX Short-Term Futures ETF VIXY
ProShares VIX Short-Term Futures ETF seeks to track the performance of the S&P 500 VIX Short-Term Futures Index, which measures the movements of a combination of VIX futures and is designed to track changes in the expectation for one month in the future. ProShares VIX Short-Term Futures ETF is ideal for investors looking to gain from an increase in expected volatility of the S&P 500. The fund charges an annual fee of 0.85%.
ProShares VIX Mid-Term Futures ETF VIXM
ProShares VIX Mid-Term Futures ETF seeks to track the performance of the S&P 500 VIX Mid-Term Futures Index, which measures the movements of a combination of VIX futures and is designed to track changes in the expectation for VIX five months in the future. ProShares VIX Mid-Term Futures ETF is ideal for investors looking to gain from an increase in expected volatility of the S&P 500. The fund charges an annual fee of 0.85%.
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iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): ETF Research Reports
ProShares VIX Short-Term Futures ETF (VIXY): ETF Research Reports
ProShares VIX Mid-Term Futures ETF (VIXM): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).