Sunday, September 5, 2010

Using VXX as A Hedge

There are many different ways to hedge your portfolio, in this blog entry, I will discuss the pros and cons of using  the iPath S&P 500 VIX Short-term Futures ETN as a hedge.

First, the meaning of ETN.  ETN, just like ETF, means exchange-traded NOTES.  Basically is a financial derivative instrument using options.  You can take a look at their profile at Yahoo! Finance.

Then we look at the pros.  As it is an ETN, it closely tracks the movements of the CBOE's VIX.  In general there is about a 2 points difference between the price of VXX and the VIX index.  VXX is also traded like any other stock in the stock exchange.  You can easily buy and sell the ETN without any complicated actions to take other than your normal buy & sell.  VXX provides you a means to hedge with great convenience.

However, everything comes at a price.  VXX has its flaws too.  There is a more detailed write-up on why you should not use VXX as a long term hedge here.

Know you are doing and happy investing!

No comments:

Post a Comment