This article was originally published on ETFTrends.com.
The widely observed CBOE Volatility Index and VIX-related exchange traded products have retreated in recent weeks as U.S. markets rebounded and volatility subsided, but this complacency in the markets may be the calm before another storm.
Year-to-date, the iPath Series B S&P 500 VIX Short-Term Futures ETNs (VXXB) , ProShares VIX Short-Term Futures ETF (VIXY) and VelocityShares Daily Long VIX Short-Term ETN (VIIX) declined 27.6% as the benchmark VIX slipped to 15.6 from a reading of as high as 36 back at the end of December.
While the pullback in the VIX reflects diminished market volatility, some investors are still wary of a repeat of what happened a year ago when the Doe Jones Industrial plunged 1,175 points, marking its largest single-day point drop in history, the Wall Street Journal reports.
“Momentum has driven the market,” Mohit Bajaj, director of ETF trading solutions at WallachBeth Capital, told the WSJ. “Whenever something moves in such extreme ways, it’s tough to gauge if the run will continue.”
For now, the short or bearish volatility ETF play is back as investors bet on continued market complacency. For instance, the ProShares Short VIX Short-Term Futures ETF (SVXY) , which follows the inverse or -100% daily performance of VIX futures, increased 16.4% so far this year.
Speculators, including hedge-fund investors, have been cutting back on bearish VIX futures bets late last year in anticipation of heightened market volatility. In September, speculators held around 133,850 positions in net bearish VIX bets, compared to 22,800 in December. More recent data has not been available due to the extended government shutdown.
ETP traders have also been upping their bets on potential volatility ahead after the recent run up in U.S. equities. For example, VXXB experienced $455 million in net inflows year-to-date, VIXY attracted $50.3 million in new inflows and VIIX added $27.3 million, according to XTF data.
For more information on the CBOE Volatility Index, visit our VIX category.
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