Market Extra: Investors buy up volatility ETFs going into the Trump era

Judging by the way investors are positioning, many seem to think that the “Trump rally” will be over just as soon as the Trump administration begins.

Market anxiety has been rising in anticipation of Friday’s inauguration of President-elect Donald Trump, and traders are taking to the instruments that can provide a hedge in volatile times. Demand for one-month call options tied to the CBOE Volatility Index VIX, +2.40%  has spiked in the past week, suggesting investors may be expecting a selloff in the near term, while money has also poured into the exchange-traded products that aim to track market volatility.

While Wall Street greeted Trump’s victory with enthusiasm — his election sparked a rally that took indexes to repeated records — the excitement has waned of late. Indexes have struggled to break out of a recent range, and the VIX, a popular proxy for investor anxiety, has climbed more than 16% thus far this week. However, at 13.10, it remains well below its long-term average of 20.

Read: Trump inauguration set to unleash cascade of stock-market anxiety

Volatility-based ETPs typically move inversely to the broader market and investors use them as a form of protection, although they are designed to be short-term holdings. As stocks remain slightly positive thus far this year, and the VIX is down 6.8% year-to-date, the category has roundly fallen, with the biggest funds seeing double-digit declines.

Still, the sharp inflows indicate that investors are looking to take on additional protection as markets enter a period that could be marked by heightened volatility. In addition to the questions that remain about Trump’s temperament, policies and geopolitical aims, investors will also grapple with a Federal Reserve slated to become more aggressive in raising interest rates this year, as well as the populist movements spreading across Europe.

The 2017 inflows into volatility products have in some cases accounted for a sizable portion of their total assets. The Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures exchange-traded note VXX, +1.08%  has seen inflows of $ 103.9 million thus far this year, bringing its total assets to about $ 1.1 billion. This was by far the highest inflow of any product in the “alternative” asset class category.

Behind it was the ProShares Ultra VIX Short-Term Futures ETF UVXY, +2.05%  a leveraged fund that looked to provide twice the daily moves of an index comprised of first- and second-month VIX futures positions. The fund has seen inflows of $ 66.3 million this year, accounting for about 16% of its total assets. A similar product, the VelocityShares Daily 2x VIX Short Term ETN TVIX, +2.28% has seen inflows of $ 23.4 million, while the ProShares VIX Short-Term Futures ETF VIXY, +1.13%  has seen inflows of $ 13.2 million.

The category has also seen elevated trading of late. On Thursday, the iPath fund had nearly 36 million shares exchange hands over the session, above its 30-day average of about 33.2 million. The ProShares fund had 14.4 million shares traded on Thursday, nearly twice its average of 7.7 million.

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MarketWatch.com – Financial Services Industry News

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