Petri Redelinghuys, founder of Herenya Capital Advisors, provides analysis of ProShares VIX Short-Term Futures ETF, United States Natural Gas Fund, and Core Natural Resources.
How we got here
Conflict has broken out in the Middle East, and the world is watching closely, but it comes as no surprise, unwelcome and unfortunate as it may be. For weeks now, we have seen geopolitical tension rise between the United States of America and the Islamic Republic of Iran, and on Sunday, March 1st, the fuse had reached its end when the U.S. and Israel conducted strikes against Iran, setting off the powder keg. In the weeks leading up to the conflict, we were bullish on commodities and stocks that are part of these key resources, like oil. For one example, we looked at Sasol, which has done relatively well. While others have fled to gold or other standard safe havens for comfort, we have sought protection elsewhere.
ProShares VIX Short-Term Index (VIXY)
One instrument we looked to for protection is the VIXY, which invests in near-term VIX Futures that reflect volatility, so when the world feels unstable, and volatility rises, VIXY goes up too, which you want to be long in. Our strategy includes holding cash for moments like this to grab opportunities, plus downside protection like a Top40 put warrant on our local portfolio if markets fall. Most retail investors can’t access VIX options or futures, making VIXY appealing, especially since we’ve seen volatility explode in past conflicts like Russia-Ukraine. We’re not panicking to dump strong stocks for crowded safe havens like gold; instead, we hedge with protection and buy opportunities smartly.
Core Natural Resources (CNR)
Core Natural Resources focuses on coal, which the U.S. uses two types of for energy production and the smelting of steel. With oil flow worldwide being interrupted, stopgaps will be needed, and one old reliable is coal, which is still widely used today as the core of most of the world’s energy grids. Coal is one of the most favourable alternatives because it is so simple for us to turn to, since we have been using it since the beginning. If events continue to escalate, then we most likely are going to be looking at these alternative resources for a while.
U.S. Natural Gas (UNG)
With refineries in the Middle East getting hit with munitions and being put out of operation, the world looks desperately for alternatives for the oil they cannot get. One alternative is United States Natural Gas. UNG is another near-term instrument, which means these are futures with less than 30 days to expiry and are basically just a play on the price of natural gas. We did not choose this due to the volatility, but rather the fact that natural gas is going to be utilised more by nations as a solution, even temporarily, to supply their energy grids with power, which is great if you hold a position in an instrument of that field.
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