All the money that has poured into volatility ETFs from nervous investors is influencing the market the products are designed to track: VIX futures contracts.
The spike in trading volumes for VIX futures in March “appears in large part due to the growing popularity of ETFs and notes, which are structured to generate returns as equity volatility rises,” the Financial Times reports, adding that the products have gathered $3 billion of inflows year to date. [Why Trading in VIX ETFs is Surging]
The rising use of volatility ETFs and ETNs has led to concerns the VIX could be sending “distorted messages” about future expectations of market behavior, according to the article. [Volatility ETFs Thumped]
Despite the popularity of volatility funds, they fell last month along with the CBOE Volatility Index, which touched its lowest levels since the summer of 2007. Additionally, they’ve been hit by “contango” in the VIX futures market. [VIX ETFs: Beware Contango]
The recent plunge in VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX) has also put volatility products in the headlines. [TVIX Flop]
There are lingering concerns that these funds are impacting the VIX futures market, which is in contango. Longer-dated futures are more expensive than the spot price, “suggesting that investors are worried stocks could stumble in the coming months,” according to the FT story.
“The VIX futures market is shallow, and so it can be easily distorted by one or two big funds,” said Steve Davenport, director of equity risk at Wilmington Trust.