The VIX S&P 500 30 day volatility index, commonly called the “Fear Index,” is down 29% on the year and has been trading in the low volatility and bullish sub-20 level for most of the year as the S&P 500 has risen almost 11%. With the VIX index having an inverse relationship with equity market performance, traders would be short the VIX if they are looking to generate Alpha in this rising market and long the VIX if they are looking to hedge out their portfolio’s long exposure. With both long and short holders of the various VIX ETF’s bullish for the entire, year there is either a lot of hedging going on using the VIX, or quite a few wrong-way VIX volatility bets.
There are twenty VIX related ETF’s trading at the moment, with a total market cap of $3.6 billion. These ETF’s are unleveraged, leveraged or inverse but most of them have small market caps with very little trading activity. There are only six ETF’s with market caps over $100 million. These six ETF’s make up $3.3 billion, or 92%, of the VIX ETF market and are the basis of this research report.
Investors were bullish in all three VIX ETF types (unlevered, levered and inverse) by buying and buying to cover the levered and unlevered VIX ETF’s and selling and short selling the inverse VIX ETF’s. Year to date, there has been over $8.7 billion of bullish activity in the VIX ETF’s even as the VIX Index is down -29.38% for the year.
VIX ETF long holders and short sellers have been trading against the trend through most of 2016. Traders continued to look for added volatility in the S&P 500 via the VIX ETF’s, but the index traded down three out of four quarters. VIX ETF traders were primarily looking to hedge a potential increase in volatility from their portfolios, but even with this year’s political, commodity and economic instability the VIX Index continued to fall. We are seeing these positions continue to increase in the 4th quarter, albeit at a slower pace, so the fear of increased volatility still exists. If these positions start to unwind it would indicate that portfolio managers are removing their hedges and the threat of increased volatility in the S&P 500 is diminishing.
For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC Ihor.Dusaniwsky@S3Partners.net
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