Fidelity Investments Bans Investing in Fear Gauge ETFs

February 12, 2018 — 1:14 PM EST

With losses mounting for an exchange-traded fund (ETF) that bets on a lack of volatility, Fidelity Investments banned the product, preventing clients from buying shares in it.

According to a report in Reuters citing an alert that Fidelity sent out to brokerage clients late last week, the Boson-based fund company said, "This security is restricted from online opening trades or restricted to closing trades only," referring to the ProShares Short VIX Short-Term Futures ETF (VIXY). The ETF had benefited from the lack of volatility, but with stocks tanking since the start of February, VIXY has been suffering. According to Reuters, the ETF lost an eye-opening 90% of its value last week amid a huge sell-off in stocks.

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With stocks setting new highs seemingly every month for the past two years and with volatility failing to show up during the same period, investors have been pouring money into options, futures products and ETFs betting that volatility will remain low or keep falling. Those investments had given investors in some instances triple-digital annual returns as the stock market moved higher. But that has come to a crashing end, resulting in the action on the part of Fidelity. According to Reuters, Credit Suisse said last week that it would end investing in the LJM Preservation and Growth Fund, which once had $800 million under management but has seen more than 80% of its value evaporate along with the gains in the stock market. Reuters noted that the fund also bet on the markets remaining calm with little volatility.

With risk seeping into the markets, online brokerages have been taking steps to protect their clients. Take the ever-volatile cryptocurrency bitcoin as one example. Wells Fargo & Company (WFC), the national bank that runs the WellsTrade online brokerage service, joined Merrill Lynch in January in prohibiting its brokers from selling Grayscale's Bitcoin Investment Trust Fund. According to a report in WealthManagement.com, citing a person familiar with the matter, Wells Fargo is not letting advisors trade the bitcoin fund or pitch bitcoin futures to customers. The policy also applies to advisors who are part of Wells Fargo's Advisors Financial Network. What's more, the report noted that there are no current plans by Wells Fargo Advisors or Wells Fargo Securities to create a trading desk for cryptocurrencies, which is something the report noted had been rumored.

Merrill Lynch is also banning these investments. Citing a memo, Reuters reported that, as of Dec. 8, Merrill Lynch stopped signing off on new orders for the Bitcoin Investment Trust, citing "suitability and eligibility standards of this product." The memo was reportedly sent to around 17,000 brokers at Merrill Lynch and Merrill Edge.

The Bitcoin Investment Trust Fund is run by Barry Silbert, a former Wall Street investment banker and a big supporter of cryptocurrencies. "We look forward to speaking with Merrill Lynch and addressing any questions or concerns they have about the Bitcoin Investment Trust," Silbert told Reuters in an email.