Volatility-linked ETFs tracking VIX futures contracts are notorious for vaporizing big chunks of investor capital with the funds losing most of their value in recent years.

For example, the $1.3 billion iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) was down 70% for the trailing year through June 19, according to Morningstar. [Top ETF Wealth Destroyers]

Volatility exchange traded products are designed as short-term market hedges, although they won’t exactly replicate the spot VIX because they follow futures contracts based on Wall Street’s “fear gauge.”

VXX was up nearly 8% on Thursday as the Dow plunged more than 200 points in the wake of Federal Reserve Chairman Ben Bernanke’s comments that the Fed could pare back its bond purchases later this year.

The VXX rally appeared to have burned some traders who were betting against the volatility product with short positions.

“There’s still a gigantic amount of shorting going on in the market’s volatility exchange traded funds and notes,”Brendan Conway at Barron’s reported earlier this week. “It amounts to a bet that market volatility is going down, or at least nowhere fast — and by inference, the stock market must be in good hands.”

The short interest in VXX is 86.2%, according to XTF.

Next page: ‘Profits can evaporate quickly’

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