When the market gets rocky, many traders flee to volatility ETFs to take advantage of the increasing uncertainty in markets. A volatility exchange-traded fund lets traders bet on an increase in the stock market’s volatility. It can be a highly profitable wager if the market suddenly becomes more volatile — for example, if it crashes — but the fund’s price constantly erodes due to how the fund is structured.) to create a fund that rises in value when the market gets rocky.
—Price may spike quickly: When the market suddenly turns volatile, the price on some volatility ETFs may rise hundreds of percent in just a few days. So if they place a well-time trade, traders can earn many times their wager quickly.—Meant to be held for very short periods: Volatility funds are really meant to be held only for short periods, giving exposure to the short-term movement of volatility.
—The targeted exposure: Volatility ETFs provide different exposures to the market, in terms of time frame , whether they perform inversely to what they’re tracking and whether they take a leveraged approach to magnify gains.
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