Volatility speculation (and hedging) seems to be in fashion. Take the ProShares Ultra Short-term VIX ETF for example. The fund seeks to deliver 1.5X the performance of the short-term VIX futures contract. The fund isn’t terribly large with only $300 million in assets, but consider these volume figures.
In 2016, the ETF traded 51 million shares. In 2017, volume increased to 814 million shares. Then last year, volume soared to over 2 billion shares. At an average price of about $60 per share, the dollar volume of the ETF was about $120 billion, or 400X the assets in the fund.
You read that right. The fund’s assets are fully turning over on a daily basis. One can only hope that the traders and speculators who find such a strategy appealing know what they are doing.
Recall what happened to the XIV fund (an ETF that shorts volatility). After doubling in 2017, the fund lost 96% of its value over the course of two days last February. That’s not a forecast that the ProShares fund will meet a similar fate, but speculating on volatility bears no resemblance to investing.
Those interested in investment should steer clear.
Jeremy Jones, CFA
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