June 28 Investment Digest Daily Alert Today Forbes/ISA Closed End Fund and ETF Report Analyst Jack Colombo recommends an ETN (exchange traded note) to use as a short- to medium-term hedge.
“The recent volatility in the market seems to revolve around what the Federal Reserve is going to do next and how this will affect interest rates. If the Fed announces a date certain for ending its low interest rate policy, markets will likely exhibit an extreme response, crashing the markets as highly leveraged investors all sell at once. To avoid an epic crash, the Fed puts some uncertainty into its policy and keeps it vague so investors will have to interpret their meaning. This will moderate a crash as investors will be uncertain, some will sell immediately others will not. This seems to be the course the Fed is trying for, but we think a consensus will form fairly quickly with the same extreme result. It’s a lot like the pilot of your plane announcing, ‘There is no cause to be alarmed’ and then clicking off.
“Either way volatility should increase in the coming months as the Fed tries to unwind the leverage created by its policy. We recommended the C-Tracks ETN Volatility Index ETN (CVOL, NYSE Arca) last January for a short-term buy. We think the time is ripe to buy it again. The fund last traded at $13.62. The fund provides exposure to a rolling portfolio of the third and fourth month VIX futures contracts. In addition, it has a variable short exposure to the S&P 500 Total Return Index. The ETN is in the form of a bond and it matures in November 2020 at a theoretical price based on volatility and market performance. It is not meant to be a buy and hold security, but as a hedge against a volatile market decline. Note, this is a highly speculative security best used as a hedge for the next month or two. Buy with a trailing stop loss order.”
Jack Colombo, Forbes/ISA Closed End Fund and ETF Report, www.incomesecurities.com, 800-472-2680, July 2013