Volatility-linked exchange traded products such as iPath S&P 500 VIX Short-Term Futures ETN (VXX) and ProShares Ultra VIX Short-Term Futures (UVXY) fell sharply Thursday after Fed chief Ben Bernanke reassured markets the central bank will keep rates low for the foreseeable future.
VXX was down nearly 3% while UVXY, a leveraged ETF, slipped over 5%. The products are designed to track futures contracts based on the CBOE Volatility Index, or VIX.
The exchange traded products were trading at fresh split-adjusted lows. VIX ETFs have undergone reverse share splits in recent years as their share price fall.
For example, VXX is down about 70% for the trailing 12 months, according to Morningstar.
In stocks, the Dow rallied about 150 points at Thursday’s open to rise above its all-time record closing price.
“The Fed is emphasizing that policy is going to remain accommodative in the near term,” said Tim Gibbens, an investment manager at Alliance Trust, in a Bloomberg report. “It’s a highly flexible and data-dependent stance which can mean that bond purchases won’t necessarily stop this year. They’re trying to manage market expectations after being surprised at the reaction after May.”
The VIX fell below 14 at one point Thursday for the first time since May. Wall Street’s so-called fear gauge has been in the spotlight this week after Citigroup’s equity trading chief said the VIX is flawed.
“A big mistake the market makes is looking at the VIX as an indicator of stock market risk. Why? Because it’s an asset class and it’s more traded for yield than protection,” said Mike Pringle, global head of equity trading at Citi, in a Reuters report.
“The growth of structured products around VIX drove that move. In most cases, the VIX is sold to generate yield but during some stress periods, the weakness in the spot level triggers significant computer-generated technical buying from these products,” he said.
iPath S&P 500 VIX Short-Term Futures ETN
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