Who's old enough to remember the great Volmaggedon when multiple products tied to the VIX suddenly imploded?
Most of you should remember it. It only happened three years ago. In a time when investors were enjoying a time of record calmness in the equity markets, traders began loading up on inverse volatility futures bets, figuring that they were easy money since the market was barely moving.
Until it didn't. The mention of interest rate hikes spooked the markets and the S&P 500 dropped 4% in a single day. The VIX took off like a rocket and left short VIX positions holding the bag and facing significant margin calls. The VelocityShares Daily Inverse VIX Short-Term ETN (XIV) followed that short VIX strategy and got turned upside down, ultimately needing to liquidate itself altogether in accordance with the note's guidelines.
The implosion ushered in a brief period where ETF and ETN issuers realized that maybe leveraged and inverse products had pushed a little too far. Leveraged products, of course, still exist, but we saw things happening, such as Direxion cutting 3x leverage to 2x on some of its products and issuers hesitating to launch new leveraged products.
It seems like all that's old becomes new again! The leveraged volatility product market is growing once more!
This week, ConvexityShares filed for a pair of volatility-linked ETFs - one designed to deliver the daily performance of the fund's underlying index and the other designed to deliver 1.5x the daily performance.
In a world where double- and triple-levered ETFs are fairly commonplace, a fund that delivers 1.5x the daily return of an index might seem relatively tame, but when it comes to market volatility, it could move sharply and swiftly.
A sharp rise in volatility is what killed XIV back in the day. One day it was fine, the next day it's dead. When it spikes, the VIX can rise very quickly, which makes even a modestly leveraged VIX product potentially very dangerous.
To be clear, the ConvexityShares Daily 1.5x SPIKES Futures ETF (SPKY) and the ConvexityShares 1x SPIKES Futures ETF (SPKX) aren't directly linked to the VIX. Instead, they're benchmarked to the T3 SPIKE Front 2 Futures Index, which is essentially a quasi-VIX index.
The fact that these are both long volatility ETFs and not inverse bodes well for their survival, although I'm not sure I'd necessarily recommend that investors use them. Sure, short-term swing traders will probably find them advantageous. Of course, the ProShares Ultra VIX Short-Term Futures ETF (UVXY) already exists, so it's not like this is a new product, but it does show that there's a market for leveraged volatility.