Last summer, I often covered the difference in short-term performance between the Russell 2000 and S&P 500. I suggested that the VIX, as a measure of implied volatility, was a good predictor for this capitalization premium, and that claim often held up. I even went so far as to analyze the high-amplitude periods of this relationship. However, as the actual volatility of volatility has increased dramatically since last fall, my suggestions have been more and more difficult to implement.

I wanted to explore why this relationship had changed, and so I've taken a look at the Dow 30 (DIA), S&P 500 (SPY), and Russell 2000 (IWM) since 2002. The figure below shows the cumulative return of each index ETF in the top pane. The bottom pane shows the trailing 100-session percentage-correlation between each pair of indexes.

ProShares has offered a variety of "Ultra" and "UltraShort" sector ETFs for more than a year now. These funds are designed to track twice the return of the underlying index, and each corresponding long fund is created to match its corresponding short.

There is no doubt that these ProShares offerings have been the subject of a great deal of interest. They promise the rewards of leveraged sector returns without the headache of margin or portfolio construction, allowing profitable bets with less capital and less risk. This might not come for free, however, and many have investigated how closely these funds track their double-return target in terms of price. For more on that topic, I suggest this article directly from ProShares.

The following chart represents the total percent change for each of the S&P Select Sector ETFs for the past session, week, and month.

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As I've discussed before, the nature of the VIX and its technical dangers provide a large disincentive to ETF issuers. In the absence of a VIX ETF, however, other options do exist that allow you to effectively purchase volatility. Transaction costs remain a large issue in any such endeavor, and so I have constructed what is most likely the simplest option.

The most VIX-correlated ETFs on the market are, nearly without expection, ProShares Ultra or UltraShort ETFs. It is likely that ProShares or their managing counterparty is using volatility contracts of some type in the management of these products. As a result, one of the most efficient proxies to volatility is to purchase equal amounts of the UltraShort S&P500 ProShares (SDS), and the Ultra S&P500 ProShares (SSO). This portfolio yields the following returns against the VIX:

As volatility has increased over the past months, the ProShares Ultra ETFs have seen a dramatic increase in average dollar liquidity. There are exactly 50 of these leveraged instruments at the moment, and they are listed below, sorted by age.

I've taken the product of the close and the volume for the 46 funds that have traded at least 150 sessions and averaged their daily cross-section. The following is a chart of this average dollar liquidity over the past 150 sessions in blue, with a 20-session moving average in red. The trend quite clearly indicates that not all market volatility is bad for ETFs.

I've covered the VIX and the best way to own a pseudo "VIX ETF" in the past, and given the high-volatility regime we've seen over the past few months, I figured it would be a good time to update this data.

I've calculated the daily log-return correlation of the closing prices of the VIX and 1100 ETFs and CEFs, and the top 20 are shown below. The results are dramatic, as literally every fund is a ProShares fund, and 14 of 20 are UltraShort funds.

The past week provided the first signs of support in the overall market for a long while, with financials rising, energy falling, and two consecutive overall days in the black.

The top gainers relative to the S&P for the week were financials and materials, with energy and technology falling the hardest compared to the market. Crude fell below $90 on Friday as well, likely decreasing inflationary pressure and giving the Fed less downside risk for lowering rates, further widening the difference between financials and energy.

In the past, I've covered the difference between long-term and short-term sector-to-market correlations as a possible arbitrage opportunity. I've performed the analysis just as before, comparing the correlation over the past 50 periods to the previous 500 periods.

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Top 30 5-Day ETF Dollar Flows

I've taken some of the most commonly referenced indexes and calculated a general comparison of their respective tracking ETFs' behavior over the past 1,600 sessions. All numbers are calculated on daily adjusted log-returns.

Once these first four moments and the Omega measure are calculated, I rank them as optimally desired - increasing mean, decreasing standard deviation, increasing skewness, decreasing kurtosis, and increasing Omega ratio. Finally, the indexes are sorted by their average rank as shown in the last column.

Last week, in response to a Bespoke article, I'd generated an image of the change in S&P 500 correlation of the Select SPDR Sector ETFs between the past 50 and 500 sessions. Since the FOMC statement, nearly all of these sectors have pulled back to their longer term correlations.

Michael Panzner did an article today about whether the S&P's gains mean anything in real dollar value, and I decided to take a quick stab at a way of visualizing this. Therefore, I've charted here the relative performance of the streetTracks gold ETF and the S&P tracker (GLD and SPY).

This is the cumulative sum of the daily difference in log-return over the past 100 days, and as you can see, despite the S&P's impressive summer, it has still lost value relative to gold. As an example, yesterday's post-FOMC S&P gain led to a log-return of 0.029. After adjusting for gold as numeraire, the return is nearly halved to 0.0188.

After closing above 20 on the 26th of July, the CBOE Volatility Index has closed above this mark since. Only on July 27th, July 31st, and August 8th has the VIX even touched below 20 intraday.

Since August 8th, the VIX has remained entirely above this mark, with option premiums and volatility bouncing between primarily between 20 and 30. The Volatility Index hit its peak on August 16th, touching 37.5 on runaway fears.

These numbers are estimated simply by multiplying the dollar change in share price by the volume and summing over the desired interval. Though obviously susceptible to intraday information loss, they give a reasonable idea as to where dollars are headed first.

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In the same vein as my past VIX ETF proxy posts, I've calculated the daily log-return of the VIX and found all those ETFs with over positive 50% correlation to it. These ETFs should be representative of the next best way to easily achieve a volatility proxy in your portfolio. I've also included the correlation of these top ETFs with each other over the past 50 sessions, as that should likewise allow for some further diversification.

The majority of these are obviously short to the indexes, but it's interesting as well to note that the fixed-income treasury and bond ETFs do a decent job. The fact that most ETF portfolios should already include a decent weight of these fixed-income ETFs means that achieving such a proxy should be less difficult than one might assume.

I noticed that Bespoke highlighted some changes in the sector correlation to the S&P 500, but disagreed with some of their choices in the piece.

One of my biggest caveats with most analysis that's done has to do with the difference between log-return and percentage return. Especially given long-term spans with weekly intervals as in their post, the difference becomes marked when one calculates correlation. Furthermore, I think it's relatively trivial to accept that today's economy is not well-represented by the economy of 1990, as several large shifts in domestic focus and global trade have no doubt changed many sectors' dynamic relation to the overall economy.

One of the first things I did on this blog, way back in April, was to cover crude oil ETFs and their performance relative to spot. This was a pretty big issue at the time, as many of these funds were hit with contango tracking issues that left many upset.

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I just wanted to remind readers that I had been very interested in strange behavior in the municipal closed-end fund market over the past few months (#1, #2, #3), and had speculated that someone knew about something in the works in ETF land.

Back on May 25th in this article on the beginning of a strange summer for these municipal funds, I said:

As this past summer has seen a long-term regime change in the systemic market volatility, discussion of the VIX and other volatility indices has picked up dramatically. Though volatility has been an issue many times in the past, however, one thing has changed since the last period of high volatility - more and more investors expect more and more complicated products to be tradeable in easier and easier ways.

For example, the ETF market has provided a large number of products specializing in commodities, bonds, and even inverses. None of these are assets that are impossible or sometimes even difficult to trade, but in sum, there are hundreds of ETFs and CEFs new in the past 10 years that provide nothing but access to these holdings.