Markets Tremble as Trump Tariff Threats Ignite Volatility Frenzy

Market Volatility Spikes on Renewed Tariff Threats from President Donald Trump

President Donald Trump’s recent social media post warning of a 50% tariff on EU goods, criticizing the bloc as "difficult to deal with" on trade, has sent shockwaves through global markets. The threat of increased tariffs raises concerns about the escalating trade tensions and their potential impact on economic growth.

The market volatility level represented by the CBOE Volatility Index (VIX) jumped 29.3% last week, indicating growing fears among investors about the future of the economy. This level suggests that market worries have started to set in. In fact, the VIX tends to outperform when markets are declining or fear levels are high. As such, products tied to the VIX, such as iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) and ProShares VIX Short-Term Futures ETF (VIXY), have gained traction in recent weeks.

Tariff Trigger

President Trump’s threatened tariffs are set to take effect on July 9, after he delayed the initial deadline of June 1. The President’s criticism of the EU as "difficult to deal with" on trade has added fuel to the fire, raising concerns about escalating trade tensions between the US and Europe. This comes at a time when investors are already wary of the impact of tariffs on economic growth.

Moreover, Trump warned that all smartphones made outside the country could soon face a 25% import tax if not manufactured in the United States. Apple (AAPL) and Samsung devices are likely to be among those affected, as they have significant production bases overseas. This has raised concerns about the impact of these tariffs on consumer prices.

Yield Surge

In addition to market volatility, fears about a ballooning US deficit have pushed long-term interest rates higher, making borrowing more expensive for consumers and businesses alike. The 30-year Treasury yield has reached its highest level since October 2023 last week, following the passage of a bill that could significantly worsen the US deficit.

The lawmakers’ move has raised investor concerns about the sustainability of US fiscal policy, leading to higher yields as investors demand greater compensation for perceived increased risk. This has put pressure on consumer loans, which could strain an economy already burdened by Trump’s recently implemented universal tariffs.

ETFs in Focus

As market volatility continues to reign supreme, products tied to VIX futures have been gaining momentum. Here are key details about four such ETFs:

iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)

iPath Series B S&P 500 VIX Short-Term Futures ETN focuses on the S&P 500 VIX Short-Term Futures Index, which provides access to equity market volatility through CBOE Volatility Index futures. This product offers exposure to a daily rolling long position in the first and second-month VIX futures contracts.

• Market capitalization: $358.4 million
• Average daily trading volume: 5 million shares per day
• Fees: 89 basis points (bps) per year
• NAV price: Not publicly available

ProShares VIX Short-Term Futures ETF (VIXY)

ProShares VIX Short-Term Futures ETF provides long exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration.

• Market capitalization: $126.8 million
• Average daily trading volume: 884,000 shares per day
• Fees: 85 bps per year
• NAV price: Not publicly available

ProShares Ultra VIX Short-Term Futures ETF (UVXY)

Investors seeking substantial gains in a short time frame may consider this leveraged volatility ETF. ProShares Ultra VIX Short-Term Futures ETF offers exposure to one and a half times (1.5X) the daily performance of the S&P 500 VIX Short-Term Futures Index.

• Market capitalization: $466 million
• Average daily trading volume: 13 million shares per day
• Fees: 95 bps per year
• NAV price: Not publicly available

2x Long VIX Futures ETF (UVIX)

2x Long VIX Futures ETF seeks twice the performance of the Long VIX Futures Index, charging investors a fee of 1.77% per year.

• Market capitalization: $363.4 million
• Average daily trading volume: 6 million shares per day
• Fees: 1.77% per year
• NAV price: Not publicly available

Conclusion

Investors should note that these products are suitable only for short-term traders. Most of the time, the VIX futures market trades in a condition known as contango, where the near-term futures are cheaper than long-term futures contracts. This can result in losses over long periods as volatility ETFs and ETNs like VXX must roll from month to month to avoid delivery.

However, given the current market conditions, now seems like an opportune time to add these products to your portfolio. Just remember that they’re designed for short-term trading and should not be held for extended periods due to potential losses from contango or other risks associated with volatility trading.