VIX related ETFs and ETNs have been an area of incredible growth in terms of increased trading volumes and asset inflows in the past few quarters, and product innovation in the space is evident as well as a number of issuers are now involved in the space. For time, only iPath was active in the volatility arena, but now VelocityShares, ProShares, UBS, and even Citi have registered products in the category. However, it is more important than ever for investors, advisory firms, and institutions alike to recognize that these products generally differ in their index construction, and they can be used effectively as directional trading and hedging tools if employed properly and not simply viewed as direct plays on the VIX index itself, which they are simply not.
Christian Wagner, Chief Investment Officer of Longview Capital Management (http://www.longviewcptl.com/) based in Wilmington, DE and advisor to the Longview Global Allocation Fund (a mutual fund under ticker: LONGX) clearly believes that VIX related ETFs and ETNs are simply not for everyone, which would likely remove a large amount of the negativity and misunderstanding that has pervaded the funds in recent years. Wagner, whom utilizes volatility based ETPs in his portfolios in a volatility based strategy states:
“Unfortunately one of the most innovative and effective hedging tools developed in recent years is also one of the most misunderstood and therefore misapplied. Investors need to grasp the fact that the VIX quote on their television screen bears little resemblance to the VXX ETN quote that appears on their trading screen. Unlike the S&P500 Index ( SPX) and the S&P 500 SPDR ETF (SPY) the VIX Index and the iPATH SP500 VIX ETN (VXX) share no similar consistent correlation. The underlying volatility index calculations and ETN components are vastly different. In times of heightened volatility these differences are multiplied. Unless the investor has a true understanding of these variances and their possible consequences they should avoid self sacrifice.”
We hope that education and understanding of what these volatility based products are designed to do, and where and when they may be most appropriate to utilize in portfolios or trading strategies will become the emphasis of the next round of scrutiny of the products instead of blind negativity based on embedded misconceptions and the lack of paying attention to detail and ever changing underlying market dynamics. The fact that none of these products are designed to track spot VIX itself in lockstep and have inherent limitations and imperfections, presents both challenges and opportunities to the ultimate end user.
This said, the products are likely not a fit for everyone, but can add value to one’s investment trading strategy or hedging strategy if employed and re-balanced properly and intelligently.
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