Volatility ETFs are facing a war on two fronts in a declining CBOE Volatility Index combined with the steepest VIX futures curve since the financial crisis.

The spot VIX that investors see quoted in the news as Wall Street’s “fear gauge” has fallen to the lowest level in five years. [‘Most Hated Rally’ Lifts Stock ETFs for Sixth Week]

A falling VIX has weighed on volatility-linked ETFs. These exchange traded products include iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), ProShares Ultra VIX Short Term Futures ETF (NYSEArca: UVXY) and VelocityShares Daily 2X VIX Short Term ETN (NYSEArca: TVIX).

The products track VIX futures contracts, not the spot price, which is a crucial difference that investors shouldn’t overlook.

Crushed by contango

The products are designed to “roll” the contracts over periodically to maintain exposure to VIX futures. They can lose money on this trade when longer-dated contracts are more expensive than the front-month contract, or when markets are said to be in “contango.” [VIX ETFs: Beware Contango]

“While the ultra-low VIX may be reflecting a calm stock market, futures on the VIX show investors fear there increasingly could be trouble brewing down the road,” CNBC.com reports. “The VIX futures curve is at the steepest level since before the financial crisis began, with each progressing month at a higher and higher level with longer term volatility at a much higher premium than short-term volatility.”

In other words, investors think volatility will pick up the next few months. The steep VIX futures curve also means volatility funds will lose more on the roll trade.

Piling into volatility ETFs

Investors looking for insurance against market pullbacks have pumped a lot of money into volatility ETFs in recent months. [Volatility ETFs Gather Heavy Inflows Despite VIX Decline]

The products have grown so large that they may be impacting spot VIX and futures prices.

One reason the August VIX futures are depressed compared to later months is because VXX is still rolling into the September contract form the August contract, said Jordan Beck of BTIG, in the CNBC report.

“That puts extra pressure on the August futures,” he said. The August contract expires Wednesday.