The swift equity rally pulled the rug from under CBOE Volatility Index, or VIX, traders as the U.S. government came to an agreement over the debt ceiling. However, inverse VIX exchange traded funds helped other investors capture the upside.
The VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV) jumped 11.9% Wednesday and the ProShares Short VIX Short-Term Futures ETF (NYSEArca: SVXY) rose 11.8%.
U.S. stocks rallied Wednesday after Senate leaders said they were working on a deal to raise the debt ceiling and to put government employees back to work, reports Ryan Vlastelica for Reuters.
“It looks like we’ll get through this, which brings the market a bit of a reprieve. Not only is this a relief rally, but we’re still in an environment with a very accommodative monetary policy, which provides a tailwind,” Judy Moses, portfolio manager at Evercore Wealth Management, said in the Reuters article.
Inverse VIX ETFs take a short position on movements in the VIX. In essence, the inverse funds bet on less uncertainty over the near-term – the VIX tracks growing uncertainty and typically reflects investor fear of market conditions.
The CBOE Volatility Index plunged 20.9% Wednesday, trading around 14.8. The VIX spiked above 20 earlier this month as the debt talks protracted on Capitol Hill. Readings below 20 generally correspond to more complacent market conditions.
Volatility-linked products are designed to track VIX futures rather than the spot price. Therefore, their losses are compounded when VIX futures are in a state of “contango” when longer-dated contracts are more expensive than the front-month contract. [VIX ETFs: An Imperfect Hedge]
VelocityShares Daily Inverse VIX Short-Term ETN
For more information on the CBOE Volatility Index, visit our VIX category.
Max Chen contributed to this article.