The Fear Report: Investing in Panic and Uncertainty
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“Be fearful when others are greedy and greedy when others are fearful." While Warren Buffett's famous quote referred to the potential of investments based on market perception, there are many ways to invest in a general rise in fear among investors.
This does not necessarily mean investors are going to panic and head for the hills tomorrow. But uncertainty in Europe could cause a rise in general investor fear that can benefit certain investments, no matter whether Europe moves up or down.
Also known as the fear index, the VIX measures market volatility and is based on expected movement over the next month. During times of extreme uncertainty the VIX can post double digit gains. This makes the VIX one of the most common measures of fear in the markets and it should be part of any fear-based portfolio.
Fortunately for investors, there are many ETFs designed to follow the VIX and mimic fear in the marketplace. One of these ETFs is the ProShares VIX Short-Term Futures ETF (NYSEMKT: VIXY). It has decent daily volume and avoids the risks of ETNs, which some of the other VIX trackers actually are. The ETF is currently trading near its 52-week low, after the VIX itself fell from its highs in the fall of 2011.
For more aggressive investors, Proshares has also created a 2X leveraged VIX ETF called the ProShares Ultra VIX Short-Term Futures ETF (NYSEMKT: UVXY). Like other leveraged ETFs, UVXY carries the additional daily losses due to daily compounding. With the generally poor performance of the VIX in recent months, the ETF has magnified these losses falling from a 52-week high of $244 to today's price of $5.30. Proshares has announced the ETF will undergo a 1-for-10 reverse split in early September, adding to the negatives surrounding this leveraged ETF.
Gold! Shiny gold!
In times of great fear, many investors turn to gold as an investment, since the metal has always held some value throughout history. In addition, inflation hawks love gold as a hedge against a devalued dollar, and the price of gold tends to rise when the Fed offers more stimulus. The shiny metal can be invested in through many ways including mining stocks, gold ETFs, and gold futures.
When the price of gold rises, gold miners get a boost to their bottom lines, and this is reflected in their stock prices. Companies like Barrick Gold (OTC BB: ABKFQ) could see substantial gains if investors pile into gold investments. As one of the largest gold miners in the world, the company is far more stable than the upstart mining companies as seen in penny stock email spam. Not only does the company offer exposure to gold prices, but it also pays a modest 2% dividend.
To simply track the price of gold, average investors can buy gold ETFs which are available from many companies and offer varying amounts of leverage. One of the most popular is SPDR Gold Shares Trust (NYSEMKT: GLD) with over $60 billion in assets. With over 10 million shares traded, this ETF is a safer ETF to use to track gold. But leveraged ETNs are available as well. VelocityShares 3x Long Gold ETN (NYSEMKT: UGLD) is one of the most highly leveraged as it seeks to replicate gains and losses 300%. UGLD, like other leveraged ETNs, falls victim to daily compounding making this ETN best as a short term play rather than a long term investment.
Profiting from fear
When panic sweeps through Wall Street, picking individual stocks can be difficult since it is often unknown what companies could be hiding. But we can invest in general fear in the markets by picking the right trackers such as gold and the VIX. Even though the market may not panic in the near future, these investments are always available for investors would want to be greedy when others are fearful.
Alexander MacLennan has no positions in any of the companies, ETNs, or ETFs mentioned in this entry.