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VIX ETFs Pull Back, Reflect Diminished Outlook for Volatility

Max Chen

This article was originally published on ETFTrends.com.

Market volatility has abated with VIX-related exchange traded funds pulling back and the CBOE Volatility Index, a gauge of market fear, dipping toward its lowest level since February.

Over the past month, the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) decreased 17.6%, ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) declined 17.6% and VelocityShares Daily Long VIX Short-Term ETN (NYSEArca: VIIX) fell 17.8% while the CBOE Volatility Index dipped to 27.1, hovering around its lowest level since late February. Potential investors should keep in mind that VIX-related exchange traded products track VIX futures and not the spot price.

The VIX has fallen to levels prior to the stock market's most volatile month in history in March when the VIX jumped to a fresh record high, breaking its previous peak hit during the global financial crisis, the Wall Street Journal reports.

Volatility typically rises when stocks pullback, so owning volatility is seen as a type of market insurance. The Volatility Index, or VIX, an instrument created by the Chicago Board Options Exchange (CBOE), is a real-time market index that represents the market’s expectation of a month period of forward-looking volatility. In most cases, the higher the volatility, the riskier the security.

Futures contracts linked to the VIX have pulled back, reflecting investors’ expectations of dampened volatility in coming months. Meanwhile, major U.S. equity indices had recovered at least 30% from their March lows.

Some pointed to the declining volatility as a sign of returning back to riskier stocks.

“As [volatility] continues to decline, [volatility-control] funds have continued to raise equity exposure, now almost doubling from the March lows but still just a little over half of pre-crisis levels,” Deutsche Bank strategists said in a research note Friday.

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