Article by: Bradley Kay
Published by: Morningstar
Date: 11 Feb 2009
“Individuals can finally invest in volatility, but what is it?
“We cannot tell if the timing is superb or terrible, but individual investors can finally invest (almost) directly in volatility now that Barclays has released two iPath ETNs based on the widely tracked VIX index: iPath S&P 500 VIX Short-Term Futures ETN (VXX) and iPath S&P 500 VIX Mid-Term Futures ETN (VXZ). While the recent crash reminded us all why volatility is the ultimate diversifier, it has also made investors wary of ETNs and the credit risk they carry. Investors need only read our previous article on ETNs to see that we would suggest caution before running out to buy any of these debt instruments. However, these intriguing new exchange-traded products allow access to an exotic asset class that used to be the preserve of institutions that could trade complex options strategies or enormous futures contracts. Strategic stakes in volatility could help sophisticated investors protect their portfolio from the next big crash, which is why we called out for these funds a scant five months ago. Now that they have finally arrived, we wish to take the opportunity to elucidate how these new indexes work, why we were so excited about the prospect of a volatility investment in the first place, and why you shouldn’t rush to invest just yet.”
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