Traders are flocking to volatility-linked ETFs designed to track VIX futures even though Wall Street’s fear gauge has collapsed to multiyear lows.
The heavy buying in VIX exchange traded products is another sign investors are skeptical of the rally in U.S. equities.
“Outstanding shares jumped to a record for the three most-used exchange traded securities that profit from volatility gains in U.S. stocks,” Bloomberg News reports.
The three volatility-linked products are iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX), VelocityShares Daily 2x VIX Short Term ETN (NSYEArca: TVIX) and Ultra VIX Short-Term Futures (NYSEArca: UVXY).
Investors buy the funds to hedge and as insurance against pullbacks in the stock market. Demand is strong even though the spot VIX is trading near the lowest level in five years.
For example, VXX hit an all-time low on Monday and has shed two-thirds of its value year to date. However, shares outstanding for the exchange traded note have jumped sixfold this year to 142 million, according to the Bloomberg article. [Volatility ETFs Dragged Down by Lowest VIX in Five Years]
A falling VIX signals investor complacency even though some are calling the recent bounce in stocks the most hated rally in history. [VIX ETFs Keep Falling Despite Rally Doubts]
“We are certainly in the summer doldrums — both volume and volatility have been extremely low,” Andrew Greeley, a senior managing director at Acorn Derivatives Management Corp., told Bloomberg. “Many of the macro risks are still with us. We suspect that volatility will move back up.”
The number of UVXY shares has increased to almost 50 million from 100,000 at the end of December, and TVIX shares jumped to 80 million from 5.1 million, according to the report. The products are designed to track VIX futures contracts rather than the spot price.
“It’s summer and nobody wants to own volatility,” said Peter Cecchini, global head of institutional equity derivatives at Cantor Fitzgerald LP, in the article. “The macroeconomic backdrop is completely divergent from the VIX and that disconnect is likely to revert.”
Volatility-linked products faced scrutiny earlier this year when TVIX fell sharply when its premium to indicative value narrowed. [What Really Happened with TVIX]
TVIX is down 91.6% year to date, according to Morningstar. The ETN is trading under $3 a share after spiking above $100 last year in a risk-off bout in markets.
VelocityShares Daily 2x VIX Short-Term ETN
Full disclosure: Tom Lydon’s clients own TVIX.