Tariff Chaos Gifts Strong Returns to Volatility Investors
- VXX, VIXY lead the performance list for the past month.
- The market play on turbulence may be fading as outflows jump.
- Uncertainty regarding the Trump administration’s tariff plans have whipsawed markets.
As markets shuddered amid mounting recession fears sparked by President Donald Trump’s trade war, tough-hided investors doubled down and pulled profits from the turbulence with a short-term volatility play.
The $588.1 million iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) and the $114.9 million ProShares VIX Short-Term Futures ETF (VIXY) both jumped more than 40% over the month through Friday, April 10, according to the etf.com Pulse tool.
Volatility ETF Bets Pay Off
The volatility ETFs, both of which invest in one-month futures contracts, attracted investors willing to zip on the asbestos suit and jump into the fire.
As President Trump unveiled his “Liberation Day” tariffs on the world, market turbulence—as measured by the CBOE Volatility Index (VIX)—jumped to its highest level since the pandemic market meltdown.
Source: etf.com Pulse tool
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Markets React to Tariff Back-and-Forth
As tariffs were imposed, repealed and threatened again, investors responded in a variety of ways. Broad market ETFs like the Vanguard S&P 500 ETF (VOO) pulled in billions, while at the same time soaring Treasury yields pushed investors into short-term bond funds like the SPDR Bloomberg 1-3 Month T-Bill ETF (BIL), which took in a net $4.5 billion this past month.
“With headlines dominated by tit-for-tat trade measures, shifting diplomatic tones and weaker forward guidance from companies exposed to international markets, volatility has returned to the forefront,” etf.com Senior Content Editor Kent Thune, CFP, said.
Investing in volatility ETFs isn’t recommended for the long term. Per VXX’s etf.com fund page, “Volatility ETPs have a history of erasing vast sums of investor capital over holdings periods as short as a few days.”
VIXY and VXX Cool Off
Bets on increased volatility have cooled. Investors pulled $75.5 million from VIXY last week. VXX had net inflows for the week due to $281.6 million coming in on April 7, though $208 million exited in the final days of the week.
Source: etf.com fund flows data
“These funds are typically used for trading or hedging, not buy-and-hold investing, since contango (the futures price being higher than the spot price) usually eats away at their returns,” etf.com Senior Analyst Sumit Roy said.
The VIX index tends to revert to a long-term average, so gains are usually short-lived, Roy added. “Think of it like gravity—there’s a constant downward pull—and it’ll take a lot of sustained panic to keep it elevated,” he said.
