Stock Rating Upgrade: VXX Deemed Undervalued
In the current economic landscape, there is a growing possibility of a volatility spike in the financial markets, as highlighted by the recent low levels of the VIX Index. This index, which measures the market's expectation of 30-day forward-looking volatility in the S&P 500, has been at its lowest this year following a spike in April 2025.
One fund, the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX), tracks futures on the CBOE Volatility Index (VIX), often referred to as the "fear index." This fund, which is considered a long volatility position via VIX futures, holds long positions in the first two months of VIX futures.
Several key factors could cause a spike in volatility leading to an increase in the value of VXX.
Heightened Market Uncertainty or Fear
Events that increase investor fear, such as fears of recession, unexpected negative macroeconomic data, or geopolitical tensions, tend to cause VIX and thus VXX to rise. The current economic climate is fraught with uncertainty, particularly regarding tariffs and their outcomes.
Economic or Corporate Earnings Shocks
Upcoming earnings announcements, especially if results disappoint or forward guidance is weak, could increase volatility. The market is mindful that record earnings projected for the second half of 2025 might face headwinds from tariffs, labor issues, and rising costs.
Market Corrections or Sudden Declines in Major Indexes
Large drops in the S&P 500 or Nasdaq due to deteriorating growth outlooks or other shocks have historically caused sharp spikes in the VIX and VXX.
Changes in U.S. Equities Market Conditions
Any signs of weakening market breadth, or changes in employment or housing sectors could increase trading volatility.
In summary, near-term catalysts for a volatility spike include macroeconomic uncertainty, disappointing corporate earnings, recession fears, geopolitical risks, or sudden market declines. These factors drive fear and hedging activity, pushing VIX futures—and thus VXX—higher.
It's important to note that VXX is not a buy-and-hold investment, but an instrument that can be used as a temporary hedge. Late August through October historically tend to be more volatile months. During the tariff wars, the fund was put under a 'Sell' rating due to high volatility, and it subsequently moved lower by -25%. However, if volatility spikes, the futures held by the fund will also move up (albeit not at the same rate as the VIX index itself).
Monitoring economic data releases, geopolitical developments, and earnings season outcomes can provide clues to potential volatility surges impacting VXX. The fund is designed to provide exposure to the S&P 500 VIX Short-Term Futures Index Total Return, which accesses equity market volatility through CBOE Volatility Index (VIX) futures.
In the past, VXX gained an astounding +80% during the April 2025 meltdown and could have mitigated many negative performances from a balanced portfolio. Therefore, investors may consider VXX as a potential temporary hedge in the current market conditions characterized by very depressed levels of volatility.
Investors may find it prudent to consider the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) as a potential temporary hedge, given the current economic climate fraught with uncertainty and the historically volatile periods typically experienced during late August through October. Furthermore, the healthcare sector, particularly pharmaceutical companies, could potentially benefit from increased volatility in the financial markets, as uncertainty and fear might lead to an increase in demand for medicines to alleviate stress-related symptoms. Similarly, technology companies specializing in data analysis and prediction might experience growth as they are better positioned to predict and respond to market fluctuations, thus presenting a lucrative investment opportunity.
