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.