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Why Investors Continue to Pour Money into VIX ETFs

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U.S. markets may have hit highs post Trump’s victory on hopes of fiscal reflation, but could not wipe out the fear of volatility from investors’ mind. This is because, the recent ascent in the market was not at all free of fear thanks to mounting tensions, be it related to the pace of Fed rate hikes next year or still-shaky global growth momentum, the yet-unseen policy formulation of the Trump administration or OPEC’s honesty in meeting the proposed output cut to stabilize oil prices (read: How to Bet on Oil with Leveraged ETFs).

In fact, investors seem to have moderate faith in the recent rally as volume has been modest since the presidential election in November. There were much stronger trading activities in the early phase of the year both for bull and bear markets.

In the chart below, we can also see that volumes for SPDR S&P 500 ETF (SPY - Free Report) in mid-November to early December – when it hit highs several times – were slightly subdued than the earlier months of 2016 when the fund was range bound or was not performing soundly.

This means that fear levels were associated with the recent rises in the broader market, keeping opportunities open for volatility tracking ETFs during this period.

VIX ETFs’ Assets in Fine Fettle

Touted as the ‘Investor Fear Gauge’, the CBOE Volatility index or ‘VIX’ is now one of the most followed market indicators around the world. It tends to outperform when markets are falling or fear levels over the future are high. The CBOE VIX determines the volatility that the equity market (i.e. S&P 500) is heading toward. With the S&P 500 advancing about 10.5% this year, the index is down 33% (as of December 16, 2016) (see all volatility ETFs here).

But what is intriguing as per barrons.com is that “year to date, VIX ETFs have seen $8.7 billion of bullish activity, despite the VIX’s decline.” According to the article, “traders continued to look for added volatility in the S&P 500 via the VIX ETFs, but the index traded down three out of four quarters thus far this year.”

Even in the ongoing fourth quarter – which is typically good for stocks thanks to all the revenue-generating events lined up for companies namely Thanksgiving, Black Friday, Cyber Monday and Santa Clause Rally – VIX ETF traders intend to hedge their portfolio from a likely rise in volatility. After all, with such a rally in the S&P 500 and the Dow Jones Industrial Average quarter to date – up 4% and 8.43% respectively (as of December 16, 2016) – a correction is well expected.

Volatility Exchange-Traded Products in Focus

This sort of market sentiment puts volatility-based exchange-traded products including iPath S&P 500 VIX Short-Term Futures ETN (VXX - Free Report) , ProShares VIX Short-Term Futures (VIXY - Free Report) and VelocityShares Daily Long VIX Short-Term ETN in focus (read: Volatility ETFs: Buy or Sell Now?).

Bottom Line

Investors should note that these products are strictly meant for short-term traders given that their nature of operation thrives on short-term investment strategies. Holding the product for a longer period of time would result in capital flight. After all, the U.S. economy is now one of the better-positioned developed countries and its bourses would remain more-or-less steady, going forward. 

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