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VIX-Linked ETF Decline Reflects Lower Volatility

tlydon@globaltrend.com (Tom Lydon)

Exchange traded funds that track CBOE Volatility Index futures are down sharply so far in 2012 on easing Eurozone debt fears and signs the economy will avoid a double-dip recession. The plunge in VIX ETFs reflects much lower volatility as stocks continue to grind higher following last year’s wild gyrations.

The iPath S&P 500 VIX Short-Term Futures ETN (NYSEArca: VXX) took a big hit last week, losing about 5.3%. The exchange traded note tracks futures contracts based on the CBOE Volatility Index, a commonly used measure of risk in the markets.

VXX saw amazing returns in 2011, as volatility ruled the markets due to the Eurozone debt crisis and uncertainty of the U.S. economy, reports Murray Coleman for Barron’s. So far in 2012, VXX has given all those gains back, losing about 32% this year. [VIX ETFs Crep Lower As Euro Fears Recede]

“By tracking an index of VIX futures,iPath S&P 500 VIX Short-Term Futures ETN provides exposure highly correlated to the volatility of the S&P 500. Sophisticated investors with long term outlooks could use this fund to partially hedge their portfolios against future downturns but must first understand the unusual mechanics of this exotic vehicle,” wrote Abraham Ballin in an ETF analysis on Morningstar. “Volatility jumps in tandem with stock price crashes, spiking whenever the market collapses. Expected volatility, thus, serves as a proxy for market uncertainty, affording the VIX Index its common moniker of ‘The Fear Index.’” [ETF Spotlight: Volatility-Linked Funds]

VXX fell victim to some of the better trading days seen last week, with major indices posting gains. The Dow Jones Industrial Average gained 1.2%, the Nasdaq gained 1.6% and the Standard and Poor 500 returned 1.5%. Fear in the markets may be subsiding, but for how long?

“While we’re not convinced that all of 2012 will be rosy, we do expect the trough phase of the volatility cycle to stretch over the first half, providing a constructive backdrop for stocks,” Jim Strugger for MKM Partners, said.

Friday finished the week off with a better-than-expected unemployment report for January. A rally in the homebuilders sector was a leading indicator that markets may have turned the corner, as some analysts use that slice of the market as a barometer for overall economic health. [Volatility ETFs: Keep an Eye on the VIX]

After Friday’s big rally, investors are speculating if 2012 will finally be the year the economy turns around.

Other volatility-linked products include:

  • iPath S&P 500 VIX Mid-Term Futures ETN (NYSEArca: VXZ - News)
  • VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV - News)
  • VelocityShares Daily Inverse VIX Medium-Term ETN (NYSEArca: ZIV - News)
  • UBS E-TRACS Daily Long-Short VIX ETN (NYSEArca: XVIX - News)
  • VelocityShares Daily 2x VIX Short-Term ETN (NYSEArca: TVIX - News)
  • Daily 2X VIX Medium-Term ETN (NYSEArca: TVIZ - News)

iPath S&P 500 VIX Short-Term Futures ETN

Tisha Guerrero contributed to this article.