With the “Volatility of Volatility” in the marketplace being quite high by most accounts, especially relating to how the markets acted after the FOMC minutes yesterday, it makes sense to revisit equity exposure in the context of volatility itself.
The VIX, which is far from a perfect measure or index of volatility itself, let alone to be used as a “fear gauge”, but it still cannot be ignored. One might note the drastic range intraday yesterday, with most of
that move occurring in the last two hours of trading.
The VIX actually popped above $18 yesterday and then finished with a $15 handle. Today it is creeping higher on some equity weakness, back above $16. In any sense, we don’t normally see intraday swings like this, much less after the release of FOMC minutes which are essentially a recap of a past event, but when we do, it is worth analyzing and potentially evaluating trading strategies that can thrive in such a theatre. The market itself was tenuous, with the SPX trading in that 1926 “recent low” range temporarily before a vicious FOMC minute induced spike in the last two hours, with some curious strengthening in the futures a good half hour before the minutes were released.
Those whom tuned out yesterday and wonder “What Happened?” may also want to keep a few things in mind before getting too carried away. The Ebola situation seemingly has not gotten better by any stretch with the death of Thomas Eric Duncan yesterday as well as what looks like little progress to most in the coalition fight against ISIS this week.
Not to mention, we are going to be hip deep in core earnings season for the reporting members of the SPX, which increases the possibility that we may continue to see vicious intraday swings and widening trading ranges. The largest “Long Volatility” ETN in the marketplace, VXX (iPath S&P 500 VIX Short Term Futures ETN, Expense Ratio 0.89%), was obliterated yesterday on huge volume in the last two hours, trading down to its 50 day MA before finding some relief.
The fund itself has suffered some outflows recently, with about $50 million vacating, but this total is small in the context of the total AUM in the fund currently ($1.17 billion), and it has notably pulled in a net >$460 million YTD. XIV (VelocityShares Daily Inverse VIX Short Term ETN, Expense Ratio 1.35%) has made a name for itself since its 2010 inception especially capitalizing on the “low Vol” and contango ridden environment associated with Long Vol products throughout much of the bull market run, and this fund now has more than $727 million in assets under management thanks to tacking on >$266 million year to date.
XIV is the second largest ETP in the Volatility category, behind VXX. Other notables that should be monitored closely in the next several weeks are SVXY (ProShares Short VIX Short Term Futures ETF, Expense Ratio 0.95%), UVXY (ProShares Ultra VIX Short Term Futures ETF, Expense Ratio 0.95%), TVIX (VelocityShares Daily 2X VIX Short Term ETN, Expense Ratio 1.65%), VIXM (ProShares VIX Mid Term Futures ETF, Expense Ratio 0.85%), and VIXY (ProShares VIX ShortTerm Futures ETF, Expense Ratio 0.85) to name a few of the largest products in the space in terms of asset sizes.
There are ten other “Volatility” linked ETFs and ETNs in the space as well, but some have failed to get any traction judging by relatively low asset levels in the $1 million to $5 million range across several of such mentioned products.
iPath S&P 500 VIX Short-Term Futures ETN
For more information on Street One ETF research and ETF trade execution/liquidity services, contact Paul Weisbruch at pweisbruch@streetonefinancial.com.
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