Anyone who has been following VIX and VIX-related ETFs over the past year knows that these instruments have been decimated. Usually investors who buy VIX or its related instruments do so as a hedge against risk, they normally only use a small part of their portfolio to do so, but a decline like what has been realized over the past year can make an investor who only has a small amount allocated to that hedge raise his eyebrows.
In every respect this is understandable, the moves are aggressive, and some of the instruments related to VIX are leveraged 2 and 3 times as well. That multiplies the risk of course, but also multiplies the risk-control if the Market begins to experience problems.
Ultimately that is exactly why investors are attracted to VIX in the first place, they want to protect their portfolios, but until recently no one has had any reason to worry. In fact, even now some investors are still as sanguine as ever. This complacency has manifested as summer months have come, but something equally as interesting has also begun to happen.
The market is still significantly outperforming VIX and VIX-related ETFs over 1-year durations, but over the past month VIX-related ETFs have begun to significantly outperform the Market. VelocityShares Daily 2x VIX Short Term ETN (TVIX) is the biggest winner, with about a 27% increase over the past 30 days. iPath S&P 500 VIX Short Term Futures ETN (VXX) is up about 15%, and iPath S&P 500 VIX Mid-Term Futures ETN (VXZ) is up about 10%. At the same time the SPDR S&P 500 ETF Trust (SPY) is down by about 2%. The outperformance during this down period in the Market has been significant, but something else also is very interesting.
Over the past 5 days the Market is actually up slightly, but VIX and VIX-related ETFs are up even more. The market has increase, and VIX has increased, and that is unusual. The fear gauge has actually increased even though the market has increased too, and that is a telling sign. It suggests investors are more concerned than they were, and it tells us risks may actually begin to surface again. If nothing more, we know that sentiment is no longer what it was a few months ago.
This shift is important, investors absolutely should be protecting their assets, and VIX and VIX-related ETFs are a good way to do that, but the ETFs that are available that follow the VIX are not all the same, and investors who are considering them should look closely at what they are buying before they make a decision to integrate a VIX-hedge. For example, the best performing VIX-ETF over the past month, TVIX, is by far the worst performing over longer term durations, so make sure you know what you are buying before you buy it. Stock Traders Daily has already suggested VIX related ETF positions to its clients.