Can I use long volatility-linked ETPs to hedge my portfolio?
Long volatility-linked ETPs may provide some protection for a broad-based stock market position, because, historically, these products have exhibited a strong inverse correlation to the direction of the S&P 500 - in other words, when the S&P has a marked decline, volatility, VIX and VIX-Futures linked indexes tend to go up. However, several factors must first be considered before implementing a long volatility-linked ETP as a portfolio hedge, including the compounding impact of daily resetting in a leveraged product, or persistent negative roll yield.
Long volatility-linked ETPs are best-suited as short-term trading vehicles, which investors can use to profit from potential spikes in volatility. Typically, holding periods are measured in days. Long volatility-linked ETPs are not designed to be buy-and-hold hedging instruments, and investors should trade with care.