This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

3 ETFs to Use as 'Portfolio Insurance'

By Michael Johnston of ETFdb

Although there are now nearly 1,100 exchange-traded products available to U.S. investors, the universe of ETFs used by most long-term buy-and-holders is considerably smaller. Beyond the "plain vanilla" portfolio-building block ETFs, recent years have seen the introduction of hundreds of more targeted and complex ETPs offering exposure to exotic asset classes and regions of the world.

Many of these more specialized exchange-traded products aren't of much interest to those in it for the long haul; they are more appropriate for active traders looking to capitalize on short-term pricing inefficiencies or implement a sophisticated investment strategy. But some of the ETFs investors may be inclined to brush off as tools for traders may also actually make a lot of sense as a minor allocation in some long-term portfolios. Below, we profile three ETFs that may be effective as "portfolio insurance" against a prolonged downturn in stock markets. These funds aren't low-risk options that tend to exhibit very low volatility regardless of the macroeconomic environment (e.g., short-term Treasuries). Instead, they offer exposure to asset classes that tend to thrive when stocks encounter turbulence.

iPath S&P 500 VIX Short-Term Futures ETN (VXX)
This exchange-traded note is linked to an index consisting of short-term futures on the CBOE Volatility Index, better known as the "VIX" and often referred to as the "fear index." The VIX measures the anticipated volatility in equity markets, making it essentially a measure of investor anxiety. VXX maintains a strong, inverse relationship with global equity markets, meaning it will thrive during periods of uncertainty and fall when confidence in the global economy is running high (the VIX touched a record high during the most recent recession, just as most other asset classes were plummeting).

Because the market for VIX futures is contangoed, VXX will regularly face some pretty strong headwinds and should be expected to have a negative return over the long term. But because it maintains a correlation with domestic and international equity funds that approaches negative 0.90, it generally performs very well during periods of turbulence in equity markets. For example, on May 6, VXX gained more than 30% at one point, ultimately finishing the "flash crash" session with a more modest gain of about 9%.

The index to which VXX is linked consists of first- and second-month VIX contracts, making it most sensitive to changes in the spot level of that benchmark. iPath also offers an ETN linked to longer-dated VIX futures contracts; VXZ is linked to an index consisting of fourth-, fifth-, sixth- and seventh-month futures contracts.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
DGP $21.45 0.00%
LBND $52.01 0.00%
VXX $22.69 -0.92%
AAPL $112.10 0.71%
FB $93.34 0.58%


Chart of I:DJI
DOW 16,790.19 +13.76 0.08%
S&P 500 1,979.92 -7.13 -0.36%
NASDAQ 4,748.3610 -32.9030 -0.69%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs