Volatility-linked exchange traded funds rallied Thursday along with the CBOE Volatility Index as the Dow Jones Industrial average shed over 400 points.
Some traders are using volatility ETFs to manage the market’s swings and hedge equity portfolios. The VIX jumped nearly 30% to climb above 40.
Volatility-linked products follow VIX futures, rather than the spot price. [VIX ETF Surge Highlights Market Unease]
The iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) vaulted over 14%. Outstanding stock in the exchange traded note plunged 48% last week for the biggest drop in its 30-month history, report Jeff Kearns and Matt Robinson for Bloomberg.
Meanwhile, the VelocityShares Daily Inverse VIX Short Term ETN (NYSEArca: XIV) experienced record inflows, adding a 49.9 million shares and becoming the second-largest volatility-related ETN, according to the report.
Wild swings in the S&P 500 helped the VIX surge 50% to 48 on Aug. 8, the largest single-day gain since February 2007, followed by a 27% drop the next day, the second-largest single-day drop.
“It [the VIX]always reverts to the mean. That’s an easy call to make,” commented Randy Frederick, director of trading and derivatives for Charles Schwab. “The tough part is to say how quickly it’s going to do that. It always reverts back when you get extreme spikes, but the question is how extreme.”
The VIX has maintained an average 20.36 over its 21-year lifespan.
Exchange traded products have helped increase volume and interest in VIX futures, with volume on VIX futures contracts hitting a record 533,430 contracts last week on the CBOE. To put this in perspective, trading on VIX futures crossed 100,000 for the first time on June 16.
“VIX futures are more expensive than what the market expects they’ll be worth in a month, and that suggests that investors are betting on a decline in the VIX,” remarked Will Lloyd, head of index products at VelocityShares.
VelocityShares Daily 2X VIX Short-Term ETN (NYSEArca: TVIX) was up about 30% on Thursday.
For more information on market volatility, visit our volatility category.
Max Chen contributed to this article.