As the equities market reached new heights and market participants became more complacent, some investors have been quietly building up their exchange traded product exposure to the CBOE Volatility Index, or VIX, anticipating a pullback in stocks.
For instance, the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), a VIX-related exchange traded note, attracted $514 million in net inflows over February, the ETN’s largest monthly inflow since July 2013, with over half of the month’s inflows coming in during the last week, reports Callie Bost for Bloomberg.
The VIX is a widely observed indicator for investor sentiment in the stock market and measures the expected or implied volatility of large-cap stock options traded on the S&P 500 index. Exchange traded products that track VIX futures allow investors to profit during rising volatility or hedge against short-term turns.
Over the past month, the VIX posted its biggest drop ever after equities advanced toward new highs on the more optimistic outlook, following the Greek bailout deal, stabilization in oil prices and dovish Federal Reserve stance.
The VIX touched a low of 12.87 Monday before surging Tuesday. The volatility index plummeted 36% over February as the S&P 500 index increased 5.5%. Meanwhile, VXX plunged 25% for the month.
“The market has short-term complacency,” Dominic Salvino, a specialist on the CBOE floor for Group One Trading LP, said in the article. “Right now, there’s near-term quiet, but they’re thinking we could get a return to a volatile environment in at least April or May.”
Additionally, for the more aggressive traders, the leveraged ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY) and VelocityShares Daily 2x VIX Short Term ETN (NYSEArca: TVIX), which try to reflect two times or 200% the daily performance of the S&P VIX Short-Term Futures Index, also saw shares outstanding increase after the sell-off in the VIX. In total, VXX, UVXY and TVIX shares increased 72% last month to 263 million on Feb. 27, a record for all three products. [Hedge Against a Volatile Year with VIX ETFs]
Jason Goepfert, president of Sundial Capital Research Inc., argues that a rise in trader interest for these types of funds typically preceded a swing in equity volatility.
“When shares outstanding rise quickly, it has coincided with declining volatility and a VIX that was about to rise in the months ahead,” Goepfert said. “Based on the recent jump in the shares outstanding, this should be a negative for stocks.”
iPath S&P 500 VIX Short Term Futures ETN
For more information on the CBOE Volatility Index, visit our VIX category.