Flight-to-Safety ETP Performance During Invasion of Ukraine

Russia invaded Ukraine a little over a month ago, creating turmoil and panic in stocks and across a wide variety of asset classes and instruments. 

In the graphic below, I capture the performance of ETPs covering a variety of traditional flight-to-safety instruments that are used to de-risk or hedge an equity-centric portfolio.  These include: 
SHY: 1-3 Year Treasuries (solid red line)
GLD: Gold (dark purple line)
UUP: U.S. Dollar (light green line)
FXY: Japanese Yen (violet line)
FXF: Swiss Franc (light blue line)
VIXY: Short-Term VIX Futures (black line)

Note that normally I would use VXX, but the price distortions due to the suspension of new creation units makes VIXY a more accurate measure.

The graphic shows that none of the ETPs above turned in particularly strong performance.  Long volatility has been the best performer for the first two weeks, but is now down more than the S&P 500 Index, with a loss of over 12%.  The top performer for the entire period is gold, which has had a fairly steady if unremarkable return during this period.  The second-best performer is the dollar, which has seen a steady upside, but has consistently trailed gold.  Three ETPs have also generated losses, following a slight uptick the first few days.  The worst performer has been the Japanese yen and the other underperformers have been the Swiss Franc and 1-3 Year Treasuries.

All in all, these traditional or generic hedges have been a disappointment.  In my next post, I will look at some hedges that are better suited to the Russia-Ukraine situation and have delivered much better results.

[source(s):  StockCharts.com]

Further Reading:
Safe Haven Options Shrinking?
Chart of the Week: Flight-to-Safety ETPs
Revisiting the Flight-to-Safety Trade
Chart of the Week: The Flight-to-Safety Trade
Why Not Point Hedges?
Forces Acting on the VIX
A Conceptual Framework for Volatility Events

While it has not been updated in a while, new readers may also enjoy older posts that have been tagged with the Hall of Fame label.

For those who may be interested, you can always follow me on Twitter at @VIXandMore

Disclosure(s): Net short VXX and long GLD and SHY at time of writing

What If Stocks Decline?

Successful investors are the ones that are always making plans for all sorts of contingencies, so it stands to reason that they should even prepare themselves for the possibility of stocks actually declining one of these days...

I was thinking about the coming correction in stocks and how to position my portfolio for that moment when equities once again feel the effects of gravity when I stumbled upon an interesting tool at ETFreplay.com that they call their Down Day Association Stats. In a nutshell, it looks at the performance of a group of user-specified exchange-traded products on those days in which a benchmark falls X%.

In the example below, I have chosen SPY as my benchmark, 2% (per day) as my threshold decline and 36 months as my lookback period. I looked at 25 ETPs that cover a wide range of asset classes and investment approaches.

Some of the results from the Down Day Association Stats are not particularly surprising. For instance, the long bond (TLT) and the dollar (UUP) have a strong negative correlation to stocks and generally perform well when SPY declines sharply. Some of the other bond choices (LQD, PCY, BWX) have been better at treading water than countertrending, but also show the benefits of diversification. The commodity choices were somewhat disappointing, generally managing to lose at best half as much as SPY, with crude oil almost matching the declines in the SPY to the penny.

Among the data points that surprised me were that the frontier ETF (FRN) fared better than the SPY in big down days, while real estate (IYR) fared worse.

Of course every decline in stocks has a different set of catalysts and puts different stresses on different asset classes, sectors and geographies, but as stocks continue to grind higher, be sure to make preparations for that eventual pullback, because when it finally does arrive, it will likely do so at an inconvenient time and with surprising swiftness.

Related posts:

• A VIX Risk Reversal
• Performance of Volatility-Hedged ETPs
• Comparing SPLV and VQT
• Performance of VIX ETP Hedges in Current Selloff
• Dynamic VIX ETPS as Long-Term Hedges
• Three New Risk Control ETFs from Direxion
• Frontier ETFs
• Some Favorite ETF Sites
• ETFreplay.com Brings ETFs Volatility and Charts Together Under One Roof

[source(s): ETFreplay.com]

Disclosure(s): long LQD at time of writing

The Year in Safe Havens

Earlier today, in Safe Haven Options Shrinking? I noted the recent failure of some of the safe haven trades in volatility, gold and crude oil securities to hedge the latest decline in stocks.

A question many observers have is how well these “big five” safe haven trades – volatility (VXX), gold (GLD), crude oil (BNO), the dollar (UUP) and U.S. Treasuries (TLT) – have fared over the full extent of the 2011 volatility storms, from the Arab Spring and Japanese earthquake/tsunami/nuclear disaster duo during the first quarter, to the U.S. debt ceiling debacle and the seemingly endless wave of disasters associated with the European sovereign debt crisis that plagued investors for the balance of 2011.

The graphic below, courtesy of ETFreplay.com, shows the year-to-date performance of big five safe haven ETPs, as well as historical volatility and drawdown data.

It is worth noting that while VXX is up for the year, it may be difficult to think of anything as a safe haven that was down 46.6% peak-to-trough earlier in the year.

Looking back with 20-20 hindsight, if one could have switched between safe haven vehicles at the most opportune time of the year, Brent crude would have been the best bet throughout the Arab Spring and up until early June, at which point gold would have been the horse to ride until August, with volatility the best play through the beginning of October and Treasuries the ideal hedge for the last two months. While the dollar has turned up as of late, the relatively low volatility in the currency market (assuming no use of leverage) means that the dollar is a better place to park investing capital until the perceived threat passes than to be employed as a hedge against a downward move in stocks.

Related posts:

• Safe Haven Options Shrinking?
• Chart of the Week: Flight-to-Safety ETPs
• Revisiting the Flight-to-Safety Trade
• Chart of the Week: The Flight-to-Safety Trade
• Chart of the Week: VXX Celebrates 2^nd Birthday
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• Forces Acting on the VIX
• A Conceptual Framework for Volatility Events

[source: ETFreplay.com]

Disclosure(s): short VXX and TLT at time of writing

Safe Haven Options Shrinking?

Back in February, in Chart of the Week: Flight-to-Safety ETPs, I examined the year-to-date performance of five exchange-traded products (ETPs) that are central to the flight-to-safety trade: volatility (VXX), gold (GLD), crude oil (USO), the dollar (UUP) and U.S. Treasuries (TLT). At that time, the Arab Spring was considered to be the main risk to portfolios and I noted that with the exception of crude oil, none of these supposedly safe havens had been profitable for the first two months of the year.

Ten months later the risk landscape is a much different one and TLT (+33.7), GLD (+10.2%) and VXX (+8.4%) have all lodged fairly impressive gains. While the dollar is flat, the picture in crude oil depends on where you look, with USO down 6.0% and BNO (a much better measure of global crude oil prices) up 15.7%.

So while it seems as if the safe havens have had a good year, a large part of that picture has changed during the first two weeks of December. Most notably, implied volatility, gold and crude oil have declined sharply in concert with stock prices, with all three acting as ‘negative hedges’ and adding insult to injury for those who were looking to cushion losses instead of exacerbate them.

Of the big five flight-to-safety vehicles, this leaves just U.S. Treasuries and the dollar as having been successful during the first half of December. With rates on the U.S. Treasuries at all-time lows and seemingly everyone waiting to time the Bill Gross short trade better than the bond master himself, this leaves only a currency that is less debased than most of its competition.

So where is the safe haven? Not too many years ago, many thought real estate was the best safe haven.

Right now one interesting short-term play is EUO, the ProShares UltraShort euro ETF, where the ETFs objective is to move -2x the daily direction of the euro.

Related posts:

• Chart of the Week: Flight-to-Safety ETPs
• Revisiting the Flight-to-Safety Trade
• Chart of the Week: The Flight-to-Safety Trade
• Chart of the Week: VXX Celebrates 2^nd Birthday
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• Forces Acting on the VIX
• A Conceptual Framework for Volatility Events

[source: StockCharts.com]

Disclosure(s): short VXX and TLT at time of writing

Chart of the Week: Flight to Safety ETPs

It has already been an interesting year for students of market sentiment, volatility and geopolitical influences on financial markets. We have seen revolutions of various sizes and shapes in the likes of Tunisia, Egypt and Libya, with smaller uprisings in Bahrain, Algeria and elsewhere in North Africa and Middle East. For the most part, volatility in the equity markets has been rather muted prior to the Libyan revolution and its influence on crude oil prices.

In this week’s chart of the week, I examine the year-to-date performance of five exchange-traded products (ETPs) that are central to the flight-to-safety trade. They include volatility (VXX), gold (GLD), oil (USO), the dollar (UUP) and U.S. Treasuries (TLT).

Note that with the exception of crude oil, the political unrest in North Africa and the Middle East has not been disruptive enough to make these trades profitable ones in 2011, though there has been an uptick across the board since violence heated up in Egypt on January 25^th and in Libya starting on February 15^th. The VXX chart does an excellent job of capturing the nature of the VXX gambit. Even with the geopolitical turmoil and spike in crude oil prices, this ETN is still down 16.2% on the year. The volatility spikes have provided VXX longs with very short-lived opportunities to capitalize on heightened market anxiety, with the chart reflecting the continued downward trend and high volatility in this ETN. [As an aside, a similar chart swapping VXZ for VXX would show very little difference in terms of performance.]

So the next time you think about a long volatility position in the context of a geopolitical crisis, give some strong consideration to some alternative flight-to-safety plays.

Related posts:

• Revisiting the Flight-to-Safety Trade
• Chart of the Week: The Flight-to-Safety Trade
• Chart of the Week: VXX Celebrates 2^nd Birthday
• Why VXX Is Not a Good Short-Term or Long-Term Play
• VXX Calculations, VIX Futures and Time Decay
• Forces Acting on the VIX
• A Conceptual Framework for Volatility Events
  

[source: ETFreplay.com]

Disclosure(s): long VXZ, short VXX, USO and TLT at time of writing

Revisiting the Flight-to-Safety Trade

Once again the S&P 500 index approached the precipice at 1040 and for now at least has backed away and found a little breathing room.

With anxiety running high, investors have embraced the flight-to-safety trade once again. The current preference is for U.S. Treasuries, the dollar (UUP), and to a lesser extent, gold (GLD).

While the most conservative plays are necessarily on the short end of the U.S. Treasury yield curve (represented by ETFs such as SHV and BIL), note that in the chart below I have included the long bond ETF (TLT) to provide a higher volatility bond for comparison purposes. The trend is fairly well established at this stage. Of the flight-to-safety vehicles, U.S. Treasuries are attracting the most interest (perhaps due to deflationary concerns), followed by gold, with the dollar the least enticing alternative, today’s 0.8% rally notwithstanding.

Not shown in the chart below is VXX (iPath S&P 500 VIX Short-Term Futures ETN), which is more of a speculative bear market play or a hedge than a flight-to-safety alternative. During the period from the April 23^rd high through yesterday (June 28^th) VXX is up 53.4%, with a volatility level of 94.5.

For more on related subjects, readers are encouraged to check out:

• Chart of the Week: The Flight-to-Safety Trade
• Chart of the Week: 10-Year Treasury Note Yield
• Yield Curve Looks Just Like May 2003
• The Battle for Bond ETF Supremacy

[source: ETFreplay.com]

Disclosure(s): short VXX at time of writing

Chart of the Week: The Flight-to-Safety Trade

This week’s chart of the week looks at some of the various flight-to-safety trades that investors have been taking advantage of since the recent closing high of 1217 in the S&P 500 index from April 23^rd.

In the chart below, note that first gold (GLD) and then the dollar (UUP) peaked as hedges against stock declines. More recently, U.S. Treasuries have been the favored flight-to-safety vehicle, with the long bond ETF (TLT) outperforming the other two alternatives and shorter-term Treasury ETFs such as IEF, not shown, attracting quite a few buyers.

Also not shown in the chart below is VXX (iPath S&P 500 VIX Short-Term Futures ETN), which is more of a hedge than a flight-to-safety alternative. During the last month VXX is up 81.3%, with a volatility level of 113.6.

[source: ETFreplay.com]

Disclosure(s): short VXX at time of writing

Chart of the Week: Impact of Falling Euro on Stocks and Commodities

Given all the general economic problems facing Europe and the sovereign debt issues related to Greece and the PIIGS (Portugal, Italy, Ireland, Greece and Spain), it is not surprising that the euro has come under so much selling pressure as of late.

Considering that the dollar index is comprised of a weighted basket of foreign currencies of which the euro comprises 57.6%, it is not too much of a stretch to think of the dollar as an inverse euro – as their almost mirror image in the chart below suggests. So given that recent weakness in the euro is accounting for most of the dollar’s resurgence and the dollar has a strong influence on the prices of commodities and stocks, it is meaningful to consider how the fluctuations in the euro have translated into changes in stocks and commodities.

This week’s chart of the week looks at ETFs for the euro (FXE), dollar (UUP), stocks (SPY) and commodities (RJI) for the last 15 months. Following the bottom of the stock market in March 2009, the euro (red line) rallied in concert with the S&P 500 index (blue line) and commodities (green line) through December 2009. As the euro began to weaken, however, both stocks and commodities initially continued their bullish climb, before selling off in January and the beginning of February. Since the early February lows, stocks (SPY) have managed to rally in spite of a weakening euro and firming dollar (purple line). Commodities, which tend to react more strongly to currency fluctuations, have struggled much more with euro weakness and dollar strength. Should the euro continue to fall, it is reasonable to expect stocks to continue to outperform commodities and of course euro weakness to directly lift the dollar to new heights.

For more on related subjects, readers are encouraged to check out:

• Where and When Will the Euro Bottom?
• Greece, Spain and the Pulse of European Anxiety
• Are You Watching Greece?
• Chart of the Week: Commodities and the Dollar
  

[source: StockCharts.com]

Disclosure(s): none

The Dollar Is UUP

I know there are many stock pickers out there who never thought they would put on commodity positions until a spate of commodity-related ETFs began appearing. Perhaps the next frontier for these former “equities only” investors is currencies.

Clearly currencies aren’t for everyone and in some respects they are the ultimate zero-sum game, but if anyone doubted their importance, just look how the markets have changed since the dollar reversed its course and started moving up a month ago.

The chart below shows the UUP ETF, the dollar ETF whose formal name is the PowerShares DB US Dollar Bullish Fund. This ETF is based on the Deutsche Bank Long US Dollar Index Futures Index, where futures contracts are designed to replicate the performance of being long or short the US Dollar against the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. For more details, a good place to start is the UUP fact sheet.

It is important to note that while the dollar has made a substantial move over the course of the past month and is now breaking out of a three year downward channel, the dollar’s move is more the result of increasing concerns about foreign economies than it is about strength in the U.S. economy. The bottom line: the U.S. economic outlook has not improved over the past month; instead, things have taken on an even gloomier tone overseas.

Finally, I would be remiss in not pointing out that on balance, U.S. equities tend to react favorably to a rising dollar. The chart of the UUP shows the dollar’s rally off of the July low buffeting the S&P 500 index.