Expect a Volatile Future: Short-Volatility Funds Flooded With Cash

Stock market volatility is a uni-directional measure. Volatility only rises when stocks decline. Curiously, the futures markets often work in reverse. When precious metals soar, the price of options on futures often rises instead of collapsing.

Exchange-trade products betting that volatility will sink lower have never been more popular as Short-Volatility Funds Are Being Flooded With Cash.

Even as the CBOE Volatility Index plunges to its lowest on record and U.S. stocks march to fresh highs, investors have continued to give the short-volatility trade their vote of confidence this year. With $2.4 billion in assets, short volatility exchange-traded funds are backed by the most cash on record, according to data compiled by Bloomberg.The funds’ meteoric rise is to some degree a bet that the U.S. stock market will keep rising, since the VIX and S&P 500 move in opposite directions about 80 percent of the time. With the S&P 500 up 16 percent and at its highest on record, the $1.1 billion VelocityShare Daily Inverse VIX ETN has surged 141 percent, heading toward its best yearly performance in five years.For now, the volatility bears have the momentum. Inverse VIX funds have nearly tripled in size this year alone. The amount of assets tracking short-volatility products rose above that of their long-volatility counterparts for the first time in two years in the third quarter.

Pennies In Front of Steam Roller

As it is in front of every market top, investors plow into the "sure thing" cannot-go-wrong trade.

Of course, we do not know when this maina will end, we just know that it will, to the extreme detriment of those late to the party.

That's a hint to those who think another 10,000% or even another 1,000% rise in Bitcoin is a "sure thing".

Mike "Mish" Shedlock

Comments (6)
No. 1-6
2banana
2banana

I have come up with a partial prep to what is coming for the average American.

  1. Take care of your health. Exercise.
  1. Stay out of debt. Live beneath your means.
  1. Keep learning. Learn new skills. Learn how to fix and build things yourself. Invest in yourself.
  1. Realize that government (at all levels) will lie to you. Government will not take care of you. Government will take everything you have if it means they stay in power one day longer.
  1. Save. Buy a little gold and silver. But realize that this is just a little insurance and not much else.
  1. Stay far away from bubbles. Hard to do when friends and relatives are getting "rich" and think you the fool
  1. Relationships are worth far more than "stuff." Families are worth way more than "stuff." Good friends are worth more than stuff.
  1. Enjoy life. It doesn't take lots of money.
  1. Learn how to shoot safely and have at least one gun. Even if you never touch it again.
  1. Be part of "something" bigger than yourself such as a Church or a volunteer organization. All the issues we see today are the same issues seen 2000 years ago. Humans have not changed.
Ambrose_Bierce
Ambrose_Bierce

In the real world bets on things like volatility would have no effect on the underlying. so if the volatility trade cracks what does that have to do with volatility and stock prices?

WildBull
WildBull

I especially like point 1. And also point 1. All words to live by, but easy to lose track of.

Blacklisted
Blacklisted

2banana, great list. You may want to also consider adding a little Bitcoin and Etherium to your gold and silver, hold more cash than normal and get your stocks listed in your name (not Street Name), sell govt bonds, grow more of your own food, learn Chinese, get ammo for your gun and consider adding a shotgun and fragile ammo (Polyfrange is coming out shortly with state of the art frangibles).

Realist
Realist

I agree with 2banana on all points except guns. Looking at the US from a distance, I see 30,000+ gun deaths per year, including a constant stream of tragic stories like Vegas and Sutherland. Sorry, but it doesn't make any sense to me.