It Might Be Time For VIX ETNs, But...
Investors have been treated to plenty of talk about increased market volatility in recent weeks, and such talk can increase the allure of volatility exchange-traded products, such as the iPath S&P 500 VIX Short Term Futures TM ETN (NYSE: VXX). Whether market participants actually gravitate to those products is a different story.
Since volatility is often viewed as being a bad thing and having a negative correlation to equities and other riskier assets, the timing could be right for VXX and rival exchange-traded notes (ETNs), such as the once notorious Credit Suisse AG – VelocityShares Daily 2x VIX Short Term (NYSE: TVIX).
“Historically, the CBOE Volatility Index® (VIX), which many investors know as the ‘investor fear gauge,’ tends to spike when markets are tumultuous. VIX measures the expected 30-day volatility of the S&P 500. When implied volatility is high, the intraday moves can be large, and when implied volatility is low, intraday ranges tend to be narrow,” said S&P Dow Jones Indices Associate Director of Commodity Indices Marya Alsati-Morad in a recent note.
We're not throwing a party over two days of TVIX action and it's hard to say this maligned ETN has suddenly redeemed itself.
Support For TVIX
That said, it does look like TVIX is actually doing what it's supposed to in recent days. While no one would accuse TVIX of being easy to understand, the way to explain it to a second-grader would be to say, “TVIX allows traders to take a short-term view on volatility's direction.” Adding to the short-term case for VIX ETNs is the following nugget.
“Since 1990, the S&P 500 has dropped in 37 percent of months (115 out of 300) and on average, when it fell, it lost 3.5 percent. When VIX gained, it gained an average of 16.4 percent. In October 2008, the S&P 500 lost 16.9 percent, its worst month on record, while VIX gained 52.0 percent in the same period,” according to S&P Dow Jones Indices.
A Word Of Caution
Despite what appears to be a strong case for VIX ETNs, traders are currently applying restraint when it comes to these products. VXX is up nearly 10 percent over the past month, but has seen December inflows of less than $1 million. Even with Monday's 15 percent tumble, TVIX is higher by 12 percent over the past 30 days, but investors have allocated just $7.1 million to the ETN this month.
The ProShares Trust Ultra VIX Short Term Futures ETF (NYSE: UVXY) has surged 26.1 percent over the past two weeks, but has also bled $224 million in assets this month. Commodities could play a significant role in any potential upside for VIX ETNs going forward.
“Since the current commodity crash has played a major role in slowing global growth, it is important to note that VIX could also protect against drops in commodity prices. Since 1990, the S&P GSCI has fallen in 46 percent of months (142 out of 311). In those months, on average, commodities fell 4.7 percent and VIX gained 3.4 percent,” according to S&P Dow Jones Indices.
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