Zacks Investment Ideas feature highlights: Barclays ETN+ S&P VEQTOR ETN

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Oct 29, 2014, 09:30 ET

CHICAGO, Oct. 29, 2014 /PRNewswire/ -- Today, Zacks Investment Ideas feature highlights Features: Barclays ETN+ S&P VEQTOR ETN (AMEX:VQT-Free Report).

Profit from the 'Fear Index' This Halloween

Over the past month, investors have seen scary market conditions as October has proven to be a very uncertain time for stocks. Many have been spooked by weak earnings from several bellwethers, while a sharp slide in oil prices has rekindled worries over global growth and the energy sector in general.

In fact, the S&P 500 is posting a slight loss over the time frame, while small and mid caps are pretty much flat as well. This flat performance doesn't really show how volatile the trading has been though, as we saw a sharp correction followed by a quick bounce back, suggesting that volatility levels are rising and that more rocky trading could be dead ahead.

Many investors have sought to play this increase in volatility with a play on the 'fear index' of the VIX in order to both hedge their portfolio holdings, and benefit from soaring levels of volatility across the market. However, the 'volatility of volatility' is quite high and some investors might be better off using volatility linked instruments in a broader ETF play the combined volatility with a 'regular' equity investment (see Why I Hate Volatility ETFs).

By using this approach, investors can benefit from rising volatility, but still stay invested in the markets if a pullback doesn't materialize. For those seeking more about this style of investing, we have highlighted below a few of the top exchange-traded products that tap into volatility as part of a broader strategy.

Any of these products could make for interesting additions if volatility levels pick up, or if market conditions remain scary past Halloween and into the final two months of the year:

Barclays ETN+ S&P VEQTOR ETN (AMEX:VQT-Free Report)

This mouthful of a name is a fancy way of saying that this ETN offers exposure to a benchmark that allocates between three components; equity, volatility, and cash. The equity component is represented by the S&P 500, while the volatility part is represented by S&P 500 VIX Short-Term futures (in ETN form, the popular , and the note looks to dynamically cycle in between each based on observed volatility levels (See Buy These Low Volatility ETFs for Choppy Markets).

The idea is that volatility is negatively correlated to U.S. equity market performance, so as volatility levels increase, the portion of the investment that is devoted to stocks decreases and the one given to VIX futures increases. When volatility is in a downtrend VQT can allocate just 2.5% of its portfolio to VIX futures, though when we are in an uptrend with high realized volatility levels, as much as 40% of the product can be devoted to VIX futures.

This approach is a bit expensive in ETN form as it does cost investors 95 basis points a year in fees, though many have embraced the technique as evidenced by its $650 million AUM. And over the past one month, VQT has beaten out the S&P 500, 1.3% to -0.55%.

PowerShares S&P 500 Downside Hedged Portfolio

Some investors are turned off by the idea of ETN investing such as with products like VQT. After all, though ETNs do not have to deal with tracking error, they do expose investors to the credit risk of the underlying issuer, though this is a pretty small risk.

Nevertheless, a new product has cropped up in recent years to offer investors exposure to the S&P 500 Dynamic VEQTOR Index, albeit in ETF form. This product, PHDG, also managed to beat out VQT on the cost front, charging investors just 39 basis points a year in fees, a bargain in comparison to VQT (read Volatility ETFs: 3 Factors Investors Must Know).

Still, the tracking error possibilities must be turning off some investors from PHDG as the fund has less in assets than VQT, though still a respectable amount at half a billion dollars. The fund has also outperformed the S&P 500 in the past month, gaining about 1.3% in the time frame.

SPXH, TRSK and VIXH

Investors also have a few other volatility-linked products to choose from, though these have failed to beat the market over the past month. However, they did outperform at the start of the downturn, and could spike if volatility levels follow suit higher. We have highlighted each briefly below for those looking for more 'black swan' protection products in their portfolio:

: This product looks to hedge against 'volatility risk' in the S&P 500, offering investors exposure to not only the S&P 500 but also both long and short holdings in short-term VIX futures. The product aims for 85% of the portfolio to be exposed to the S&P 500, and then of the remaining 15%, roughly 3% (three percent of the total portfolio) goes to 2x volatility futures, while the remainder goes to inverse volatility (read Leveraged Volatility ETFs in Focus).

: This product invests in the S&P 500 and then call options on the VIX index, determined by the current level of forward volatility. When volatility is between 15-30, 1% of the portfolio goes to VIX calls, while if VIX futures are between 30-50, 0.50% of the portfolio goes to VIX calls, which could benefit if there are short term spikes in volatility.

: This product looks to hedge against 'tail risk' in the S&P 500, offering investors exposure to stocks and then inverse and long volatility holdings. Roughly 85% of the portfolio goes to equities, while of the remaining 15%, 10.5% is allocated to inverse volatility and then the last 3.5% (3.5 of the total portfolio) goes to 2x long volatility futures, costing investors 71 basis points a year in fees, just like its sister product SPXH.

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