Butler, Pennsylvania – Short volatility strategies have been a lucrative trade over the past year, with the -1x Short VIX Futures ETF yielding an impressive 86% return, surpassing the performance of the S&P 500 Index. However, investors in the SVIX ETF recently faced a potential crisis with the near-assassination attempt on former President Trump at a campaign rally in Butler, Pennsylvania over the weekend.
As the VIX index typically rises during election years from mid-July to end-September, investors holding the SVIX ETF may encounter challenges ahead. With the increasing likelihood of former President Trump’s re-election, considerations of higher inflation, larger deficits, and potential trade wars are becoming pertinent. Therefore, investors in the SVIX ETF are advised to contemplate taking profits in anticipation of heightened market volatility.
Historically, during presidential election years, the VIX index tends to reach its lowest point around mid-July and peak towards the end of September. This pattern of volatility is understandable given the escalating political tensions and uncertainties surrounding election campaigns. As political parties intensify their rhetoric, the likelihood of tail risks increases, posing a risk to short-volatility funds like SVIX.
For those unfamiliar with the SVIX ETF, it maintains a short position in the first and second-month VIX futures, which are rolled on a daily basis. With nearly $190 million in assets under management and a 1.47% net expense ratio, the fund provides exposure to fluctuations in market volatility.
In addition to election-related risks, the potential economic policies of former President Trump, if re-elected, could further contribute to market volatility. Concerns about inflationary impacts, exacerbated deficits, and trade tensions are mounting as the possibility of a Trump presidency looms larger. The extension of tax cuts, stringent immigration policies, and protectionist trade measures could all influence market dynamics and volatility levels.
The balance of risks lies in the ongoing economic growth, with estimates indicating a moderate pace of growth in the second quarter of 2024. Markets may interpret Trump’s tax policies as pro-growth, potentially offsetting negative implications. Moreover, increased trade barriers could stimulate domestic production and contribute to job creation, countering some of the potential market headwinds.
As equity markets navigate heightened uncertainties leading up to the election, short-volatility strategies like the SVIX ETF may encounter challenges. Investors evaluating a potential Trump victory must weigh the implications of his economic policies on market stability. Prudent decision-making and profit-taking strategies are advised, with a cautious outlook on investments in SVIX emphasized.
