There are over twenty active CBOE SPX Volatility Index based ETFs, but only eight with AUMs over $100 million. Because short selling of any equity or ETF is limited by the amount of stock that is available to borrow in that particular security, these eight ETFs are the only ones with meaningful short interest.
In 2017, with the VIX index down -21.4% for the year, we predictably saw short interest in the inverse VIX ETFs decrease by 29.4% as short sellers lost $1.7 billion in year-to-date mark-to-market losses. In 2018, with the VIX index up +17.8% for the year, we surprisingly see short interest in the long VIX ETFs increasing by 31.9% while increasing only 10.0% in the inverse VIX ETFs.
The long VIX ETF shorts are increasing their VIX short exposure while being down $100 million in mark-to-market losses for the year, while the inverse VIX ETF short sellers have only increased their exposure by a quarter as much even though they are up $99 million in mark-to-market profits for the year.
This investment anomaly also exists in the long side with nominal outflows occurring in the long VIX ETFs and considerable inflows in the inverse VIX ETFs.
It appears that, after almost hitting the 15.0 level, both long buyers and short sellers of both the long and inverse VIX ETFs are looking for a the VIX index to reverse course and trend lower in the near term. Investors are betting that the buildup of volatility in January has run its course and will deflate back down closer to the 11.1 average of 2017. If the VIX breaks through the support level at 11.0 we may even see the VIX trading in the single digits once again.
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Managing Director Predictive Analytics, S3 Partners, LLC
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