‘Bull Market in Fear’ — Investors Buy VIX ETFs Despite Price Decline
September 18th 2012 at 2:06pm by John Spence
Volatility-linked exchange traded products hitched to VIX futures continue to languish near all-time lows following the Federal Reserve’s latest round of quantitative easing.
These hedging ETFs are depressed on a lower CBOE Volatility Index and “contango” in the VIX futures market.
For example, iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) is trading in single digits for the first time, Richard Bloch writes at SeekingAlpha. Still, investors nervous about a correction continue to snap up VIX-futures ETFs.
VXX is the largest volatility product with $1.7 billion in assets, according to Morningstar. The exchange traded note is down about 50% the past three months as U.S. stocks rally.
The VIX is known as Wall Street’s fear gauge because it rises when investors are seeking protection in the options market. Volatility ETFs are designed to follow VIX futures, not the spot price. [Double Whammy for Volatility ETFs: Falling VIX and Contango]
ProShares Ultra VIX Short Term Futures ETF (NYSEArca: UVXY) and VelocityShares Daily 2X VIX Short Term ETN (NYSEArca: TVIX) are leveraged volatility products.
Contango in VIX futures is a headwind for these products.
The VIX futures curve is extremely steep. This means that investors are paying more for longer-dated VIX futures, which suggests they see volatility rising in the coming months.
When this happens, volatility ETFs lose money on the “roll trade” because they need to sell expiring VIX contracts and buy new ones.
The number of VIX futures contracts outstanding has more than tripled this year as investors hedge to protect stock gains, Bloomberg reports.
“Volatility has become more attractive now as an asset class,” said Nikolaos Panigirtzoglou, JPMorgan Chase & Co.’s European head of global asset allocation, in the story.
Shares outstanding in VXX have jumped almost nine-fold this year and hit a record earlier this month.
“It’s what I call a bull market in fear,” Christopher Cole, founder of Artemis Capital Management, told Bloomberg.
iPath S&P 500 VIX Short Term Futures ETN
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.