The Biggest Problem with Playing VQT

How you can replicate -- or one-up -- the performance of the Barclays ETN+ S&P VEQTOR ETN (VQT)

by Adam Warner

Published on Nov 3, 2014 at 8:57 AM
Updated on Apr 20, 2015 at 5:32 PM

Now that we're hitting new highs, I think it's safe to say the ISIS/Ebola/End of QE sell-off has officially run its course. Aside from adding to longs, the best path was clearly to just sit tight and wait out the market turbulence. Hindsight is 20/20 that way. But, what if I told you there was an exchange-traded fund (ETF) out there that could stay long in rallies, hedged with volatility into dips, and have no exposure during market meltdowns? You'd probably tell me that that's impossible, and you'd be right. But, there is an ETF that tries to accomplish that, and it does pretty well.

That's the Barclays ETN+ S&P VEQTOR ETN (VQT), a name we mention periodically. It basically owns the SPDR S&P 500 ETF Trust (SPY) until volatility picks up. At that point, it then buys short-term CBOE Volatility Index (VIX) futures -- basically the iPath S&P 500 VIX Short-Term Futures ETN (VXX). If volatility keeps picking up, VQT keeps buying VIX futures, ultimately moving to all cash.

The chart looks pretty similar to SPY, but with smoother bumps. Here's how it looks in 2014 (click chart to enlarge):

VQT in 2014

VQT is up 6.1% in 2014, below the 9.2% return in SPY. But, the nature of the strategy guarantees that it will underperform in rallies. It earns its stripes sidestepping major declines. VQT bottomed on Oct. 2, but it still was above water for the year, up about 2%. Meanwhile, SPY kept tanking for another two weeks, ultimately forfeiting the entirety of its 2014 winnings. All told, VQT dipped 3% top to bottom over about two weeks, while SPY dipped 9%, over about four weeks.

That's a pretty outstanding performance, in my opinion. My biggest quibble is that a product like this is relatively easily to replicate, and perhaps improve upon on your own. VQT uses a rigid, fixed formula to allocate into and out of VIX futures and cash. Perhaps you can respond quicker and allocate better.

Or maybe it's not worth using VIX at all? The net effect of a strategy like this is that it misses upside, but protects against serious downside. Well, it sounds a lot like the simplest strategy in the book. Stay long when the S&P is over the 200-day moving average, and flatten out when it's under. You take small losses most of the time, but are long for the big wins. And you're not exposed to the major melts.

Now, I understand we all spend different amounts of time that we devote to watching the markets and/or trading. But, as we noted in our study recently, SPY has flipped up and back over the 200-day about 75 times in its history. That's 150 trades in 21.5 years, so we're not exactly talking about watching every tick.

I do like VQT. I'm just not convinced it's something we really have to use.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


A Schaeffer's exclusive!

The Expert's Guide

Access your FREE trading earning announcements before it's too late!


 
 

Partnercenter


NEW! Explore Schaeffer’s Partners' deals and get connected to top online brokerages with deals tailored exclusively for our readers.  Get answers to your questions regarding transfer fees, commission rates, programs and available discounts related to online trading services.

MORE | MARKETstories


The Nevada Discovery That Could Jeopardize Chinese Dominance
Click to continue to advertiser's site.
UNH Stock Pops on Accelerated Payment Promise
Analysts are very bullish on UnitedHealth stock
Extra Space Storage Stock Wavers After Downgrade
Raymond James downgraded to "underperform" from "market perform"
The Top Lithium Play of 2020
Click to continue to advertiser's site.