April may be the cruelest month, but March has been pretty bad for volatility exchange traded products designed to track VIX futures contracts.

First, these volatility-linked funds have dropped sharply this month along with the CBOE Volatility Index, which touched its lowest levels since the summer of 2007.

Second, the exchange traded funds and notes have been hit by so-called contango in the VIX futures market.

“We have seen very steep contango recently, with a big premium in the front-month VIX futures and increasing premiums all the way out in later expirations,” writes Chris McKhann at optionMONSTER.

This means that volatility funds lose money on the trade when they “roll” the contracts before expiration to maintain exposure to VIX futures. [VIX ETFs: Beware Contango]

Finally, volatility exchange traded products have suffered a black eye after the well-documented meltdown in VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX). [TVIX Fallout Lingers for Volatility Products, ETNs]

Earlier this month, the VIX dipped below 14 for the first time in five years. The VIX measures the implied volatility of options contracts on the S&P 500. Exchange traded products track VIX futures contracts, rather than the spot price.

Some argue that VIX-based ETFs and ETNs are unduly influencing the VIX futures market, writes McKhann at optionMONSTER.

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