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Volatility ETNs Can Help Decision Makers Act Rationally

Stocks in this article: VXX

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 ( ETF Expert) -- 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 (VXX) 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.

You can listen to the ETF Expert Radio Show "LIVE", via podcast or on your iPod. You can follow me on Twitter @ETFexpert .

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc., and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

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