The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- Not every exchange-traded investment is a sensible core holding. In fact, some may not even work particularly well as trading vehicles. In many instances this is the way that I feel about volatility ETFs/ETNs.
Volatility ETNs have been a nightmare for buy-and-holders. Many have seen their principal erode 30%, 40%, even 50%. And yet, the
iPath S&P 500 VIX Short-Term Futures
has demonstrated utility as a predictive tool.
Consider the two worst bear scares in the current March 2009 to May 2012 bull market. The first came in late April 2010. A steep 16% top-to-bottom decline essentially ended in the first week of July 2010. The second came in late July 2011 when the U.S. government failed to agree on a debt ceiling deal and Standard & Poor's downgraded U.S. Treasury debt. The devastating 19.5% top-to-bottom sell-off effectively ended in the first week of October 2011.
Now consider the times when the iPath S&P 500 VIX Short-Term Futures definitively broke through its 100-day moving average to the upside. You guessed it... in late April 2010 and July 2011. What about when VXX descended definitively below its 100-day trend line? July 2010 and November 2011. Not too shabby.
So here is what I propose that a self-directed investor think about. Maintain a high-yielding ETF portfolio (sans international) like the one that I delineated in my previous post, "
Hate The Sell-Off?
" (The drawdown is roughly half that of the S&P 500). However, if VXX closes definitively above its 100-day moving average, use the event to sell a significant percentage of stock ETFs in your portfolio.
Granted, VXX is hardly the only tool for deciding
how and when to lighten up on risk assets
. It does not have the world's lengthiest track record either.
By the same token, the European sovereign debt crisis didn't become a mind-boggling market concern until 2010 either. It follows that for as long as flare-ups in the European Union have dominated the mindsets of institutional traders, the price of VXX relative to its 100-day trend line has been particularly telling. What's more, it's an unemotional means for protecting against disaster.
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