Volatility ETFs Crash as Market Fears Drop - ETF News And Commentary
February 19 2014 - 2:00PM
Zacks
The U.S. stock market saw a soft start to the year on rising fears
of a faster QE taper, the subsequent withdrawal of cheap dollars,
as well as the emerging market lull. But the scenario took a sharp
turn with downbeat job, retail and manufacturing data, which sent
markets tumbling (read: 3 Low Risk ETFs for a Stormy Market).
The data once again spurred the possibilities of a slower QE
wrap-up and the market once again turned its attention toward the
safer assets. As a result, the volatility index (the VIX) – often
regarded as a fear gauge level, which touched a 13-month high of
21.4 earlier this month thanks to the stock slump – has been
bleeding heavily while the S&P index gained modestly during the
same time frame.
Volatility products tend to outperform when markets are falling or
fear levels over the future are high. As neither of these events
came to pass thanks to the muted economic indicators in the U.S.,
we saw a sharp downturn in volatility-backed products.
Downturn in Volatility Products
This year, the Fed lowered its purchase of mortgage-backed
securities to $30 billion a month and of Treasury securities to $35
billion per month. However, the Fed’s new Chairperson, Janet
Yellen, recently commented that the future course of the Fed Taper
will depend on the pace of the economic recovery and the
bond-buying program’s pace is not pre-determined (read: 3 ETFs
Surging on Weak Jobs Data).
Amid such a scenario, soft retail numbers for consecutive two
months and a weak labor market along with the weak ISM survey and
soft durable goods and factory order readings stirred doubts over
true economic recovery in investors’ minds, thereby lessening the
fears of a faster taper. Since $65 billion per month is still a
massive amount regardless, volatility products saw dire trading in
the last couple of days.
The fear-gauge CBOE Volatility Index (VIX) plunged about 29% to
settle at $13.57 in just over the last 10 days. The index is
constructed using implied volatilities of the S&P 500 index
options, taking both calls and puts into account (read: Volatility
ETFs Skyrocket on Broad Market Weakness).
A popular ETN option providing exposure to volatility, the
iPath S&P 500 VIX Short-Term Futures ETN
(VXX) shed 15.26% in the
last 10 trading sessions. The trading volumes were also below the
average level. The losses were massive in two leveraged products –
VelocityShares Daily 2x VIX Short Term ETN
(
TVIX) and
ProShares
Ultra VIX Short-Term Futures ETF
(UVXY)
– that shed about 30% in the said time frame.
The investors’ mindset seems bolder for the short-term period
rather than the mid term as a decline in the medium term volatility
product
– iPath S&P 500 VIX Mid-Term
Futures ETN
(VXZ) – was
relatively lower than the shorter ones. While all the short-term
products were down in the range of 15%, the mid-term ETN – VXZ –
tumbled 7.0%.
Bottom Line
In our opinion, doors will not open up for the volatility products
in the coming days, especially until any high-flying macroeconomic
data come out and stir up speculation on a further escalation
in the taper (read: Hedge Your Portfolio with Low Volatility
ETFs).
To add to this, the Obama government has successfully raised the
debt-limit to March 2015 putting an end to the five-month long
debt-ceiling talks. Thus, investors can easily forget volatility as
of now, and might try out investing in other assets for the time
being.
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VEL-2X VIX ST (TVIX): ETF Research Reports
PRO-ULT VIX STF (UVXY): ETF Research Reports
IPATH-SP5 VX ST (VXX): ETF Research Reports
IPATH-SP5 VX MT (VXZ): ETF Research Reports
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