The Daily Brief | April 25, 2022

Three Ways to Trade Wild Market Fear

Fear is palpable.

We can see that in the Volatility Index (VIX), which popped from a 2022 low of about 15 to nearly 30. And unfortunately, no one is quite sure what comes next. While it would be easy to run for the exits, just sit tight, and protect your portfolio until the tension fades. The last thing you want to do is run from markets that are historically resilient.

One way to protect for downside is by trading ETFs, which track the VIX.

Pro Shares Ultra VIX Short-Term Futures ETF (UVXY)

As the VIX popped, so did the UVXY ETF.

In fact, since the start of 2022, the ETF ran from a low of about $11.16 to a recent high of $15.40. From here, the Volatility Index and the UVXY ETF could see higher highs. All thanks to uncertainty about what could possibly happen next. For those of you that are new to the UVXY, the ETF was designed to match two times (2x) the daily performance of the S&P 500 VIX Short-Term Futures Index. As the VIX moves higher, the UVXY typically follows.

iPath S&P 500 VIX Short-Term Futures (VXX)

The VXX ETN, which provides exposure to the S&P 500 VIX Short-Term Futures Index. The VXX last traded at $26.15 and could see $30.

ProShares VIX Short-Term Futures ETF (VIXY)

ProShares VIX Short-Term Futures ETF provides long exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration. It last traded at $18.36 and could test $25.

Trading Tips

Sure, panic has returned to the market.

After hitting all-time highs, the major indices are slipping on inflationary concerns, Russia, and the Federal Reserve’s comments that we may need aggressive rate hikes.

Investors are panicked. They’re selling everything – but at the wrong time. If you’re one of them, stop and remember key pointers.

Have Cash on Hand

Some investors believe it’s bad to have cash laying around, an “unproductive asset that acts as a drag on such markers as return on equity.”

But that’s not the case for Buffett.

“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent,” he says.

Never Follow the Herd

In 2008, Buffett said “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”

Then in 2009, he said, “It’s been an ideal period for investors: A climate of fear is their best friend. Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.”

One of the key reasons that many investors underperform in the market is because they move in and out of assets at the wrong time.

When an investor sees everyone else making money from rising markets, that’s when they tend to throw every spare dollar into their investments. Unfortunately, when that same investor sees a group of other investors selling, the investor sells, too.

Always Be in a Strong Position to Capitalize

As Warren Buffett has often said — keeping some cash on hand allows you to take advantage of corrections without having to sell other investments.

Remember that Markets are Resilient

Don’t let a pullback chase you from the market. Remember, they’re resilient.

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