Through much of the current bull market in U.S. stocks, one of the easiest trades was being short volatility. Said another way, being long volatility, a trade made available via dozens of exchange-traded products (ETPs), was a losing strategy.
Performances of many long volatility strategies, many of which are made accessible via exchange-traded notes (ETNs), have been dreadful. In fact, it is not a stretch to say that some of the worst performing ETPs over the course of the current bull market are long volatility products. That changed this year, thanks to a spike in the Cboe Volatility Index (VIX), also known as the "fear index." (See also: What Does the Volatility Index (VIX) Indicate?)
Consider this: there are over 2,200 ETPs, including ETNs and exchange-traded funds (ETFs), trading in the U.S. Year to date, just nine are sporting gains of at least 50%, and of those nine, eight are long volatility strategies. Earlier this year, the volatility reversal was so severe that inverse volatility ETNs were bludgeoned, leading to the termination of the once popular VelocityShares Daily Inverse VIX Short-Term ETN (XIV).
The return of the long volatility trade prompted other moves among ETF issuers. In late February, ProShares, the largest issuer of inverse and leveraged ETFs, announced changes for the objectives of the ProShares Ultra VIX Short-Term Futures ETF (UVXY) and the ProShares Short VIX Short-Term Futures ETF (SVXY). UVXY "will change its investment objective to seek results (before fees and expenses) that correspond to one and one-half times (1.5x) the performance of the S&P 500 VIX Short-Term Futures Index for a single day," said ProShares. UVXY's previous objective was to deliver double the returns of that index. SVXY's objective was changed to 0.5x the daily inverse of the S&P 500 VIX Short-Term Futures Index, down from a prior objective of 1x the daily inverse of that index.
The other side of the coin is that some volatility ETPs have been surging. For example, the REX VolMAXX Long VIX Weekly Futures Strategy ETF (VMAX) has nearly doubled this year, outpacing the 88.25% gained by UVXY by over 1,000 basis points. The VelocityShares Daily 2x VIX Short-Term ETN (TVIX), a double-leveraged play on CBOE VIX short-term futures, is up nearly 79% year to date, making it the third best performing U.S.-listed ETP behind VMAX and UVXY.
Some traders have not been shy about betting that volatility will ebb. SVXY, a short volatility play, took in $2.49 billion in new assets in the first quarter, good for the ninth best total among U.S.-listed ETPs. SVXY is lower by 3.3% since the start of March as the VIX is higher by 2.8% over that span. (For more, see: VIX ETFs: Wall Street's Risky Trade on Volatility.)