We have all heard the VIX or volatility index referred to as the Fear Index or Fear Gauge. Rising VIX was meant to signal fear in the markets. That is how most investors have historically thought about VIX and traded it (directly or through Exchange Traded Products).
I have gone back in time and combined the total assets under management of XIV and SVXY (two short VIX products) and UVXY and VXX (the two largest long VIX products). There are others and it doesn’t account for the fact that UVXY incorporates leverage, but the point is the same.
The funds that in theory helped investors ‘hedge’ their portfolios went from being the dominant species to those that enable investors to sell volatility.
Short VIX Funds are Larger than Long VIX Funds (source Bloomberg)
This has rarely been the case.
Typically investors had more interest in hedging their portfolios despite the evidence that the long VIX ETFs and ETNs had to continually perform reverse splits as their share prices drifted lower (some would argue “raced” lower is a more accurate description).
While the products looking to benefit on a volatility spike still attract inflows (otherwise their assets under management would be even lower), they have lost the competition to the VIX sellers.
The only other gap of similar size and duration was in late August 2015 – AFTER the market sold off and volatility spiked.
This time, it is occurring as stock markets are near all-time highs and VIX is still close to the all-time low it set just a few weeks ago (VIX is only calculated since 1990).
Whether this has finally reached a stage of complacency is anyone’s guess, but the “Golden Goose” of selling VIX that I wrote about in March of this year – is clearly not a secret.
I’m not overly concerned about complacency, it is after all, a slow and typically low vol period for domestic markets, but it is something that investors need to focus on.
A spike in volatility could be far more problematic than the market is prepared for as even a small spike could turn into a larger problem with so many people positioned the other way.