“The longer monetary policy smothers volatility and underwrites heady valuations, the bigger the eventual recoil,” BlackRock strategists including Koesterich said in a research note.
Investors interested in hedging against short-term dips in the equities market can take a look a couple of options. The iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), a VIX-related exchange traded note, and the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) were both up about 1.1% Thursday, but the two funds declined about 32% so far this year.
Additionally, the more aggressive trader can consider the leveraged ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY), which tries to reflect two times or 200% the daily performance of the S&P VIX Short-Term Futures Index. UVXY was up 2.3% Thursday but down 59.7% year-to-date.
Investors need to keep in mind that these ETFs are designed to track CBOE Volatility Index futures contracts, not the VIX spot price. It’s a very important difference. [Father of the VIX Issues Warning on Volatility ETFs]
Volatility 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.”
For more information on the CBOE Volatility Index, visit our VIX category.
Max Chen contributed to this article.