As indexes tracking stock market gyrations hit new lows, opportunities to make money from volatility products in an age of low-yields, have proven popular with investors already enamoured with passive instruments.
With volatility in the S&P 500 hitting a 50-year low in early August it is easy to see why some investors have seen this as a green light to track the US Volatility Index, or VIX, via an exchange traded fund.
Rathbones’ head of research Elizabeth Savage says they are receiving a growing number of queries about VIX ETFs, but warns it is a dangerous game with the potential for huge future losses.
Savage said they can be a tricky game to get right, and says Rathbones has become increasingly cautious of the instruments which could catch out an inexperienced investor.
She says they are in no way the best way to improve diversification.
“They are not suitable for buy and hold investors,” Savage says.
“People look for solutions but often they do not look under the bonnet. There are much better options out there,” she adds.
Most of the concern surrounds those who buy a VIX ETF planning to hold it for the long term on the belief volatility will continue its calm trajectory.
Passive expert and senior investment manager at Seven Investment Management Peter Sleep says taking a long position in the VIX via an ETF is a “long term money losing opportunity” and that investors would be better off spending a day at Ascot races than gambling on the VIX.
“I am not a big fan,” he says of VIX ETFs.
“The VIX is a derivative of the US options market. So, the ETF is tracking a derivative of a derivative if you like. I think this is an area only for investors who know exactly what they are doing. This is demonstrated by the terminology.”
Taking short positions in VIX ETFs can be equally as troublesome.
“It is very dangerous, as you will make some money most of the time, until you don’t, and then you are subject to large and sudden losses – typically when volatility shoots up,” Sleep adds.
“If you can tolerate occasional very large losses, then you may make a reasonable return in the long term. This is strategy is akin to consistently selling options.
“I think it is really an area for professional investors and smaller investors should steer clear.