Four years after ‘Volmageddon’, new volatility ETFs to hit market

(Corrects paragraph 9 to make clear investor did not own XIV shares)

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – Two new funds that let investors place bets on stock market gyrations are expected to launch this week, potentially filling the void left by the implosion of similar products four years ago.

The 1x Short VIX Futures ETF (SVIX) and 2x Long VIX Futures ETF (UVIX) have received regulatory approval to list and will start trading on Wednesday, said Stuart Barton, chief investment officer at Volatility Shares, the company releasing the ETFs.

The new ETFs will track the daily performance of two separate volatility futures indexes, one which rises when stock gyrations pick up and another that benefits from falling volatility.

Volatility-linked exchange traded products have a checkered track-record on Wall Street, with only eight of the 20 volatility ETFs ever launched still trading, according to Elisabeth Kashner, director of global fund analytics at FactSet Research Systems.

In February 2018, a volatility-tracking note called the VelocityShare Daily Inverse VIX Short Term ETN went bust amid a surge in market volatility in an event which was eventually dubbed “Volmageddon,” taking with it nearly $2 billion in investor assets.

“Historically, investors of all stripes have struggled to use volatility-tracking ETFs well,” Kashner said.

The turbulence in February 2018 also prompted several volatility products to tweak their investment objectives to reduce risk. Since then, the combined assets in volatility-linked products has about halved to $2.69 billion, Kashner said.

Still, some investors who had been hurt by the XIV blowup said they are ready to trade the new ETFs.

“There is definitely demand from the retail community for another product,” said Seth Golden, president of investment research firm Finom Group, who experienced a sharp decline in February 2018 due to the upheaval in volatility-tracking products and derivatives when XIV collapsed, though he did not own XIV shares.

Interest in volatility-related products has grown amid the stock market’s gyrations in recent weeks. One-month trading volume for ProShares Ultra VIX Short Term Futures ETF and the ProShares Short VIX Short-Term Futures ETF, popular volatility-linked ETFs, stands at 72 million shares, up about 400% from a year ago, according to Refinitiv data.

Volatility Shares’ Barton said the new products have been designed to avoid the pitfalls that had affected older products, including the way the fund goes about buying or selling volatility futures to keep it in line with its benchmark.

The new fund’s daily valuation will be calculated from the average futures prices over the last 15 minutes of the trading day, rather than just the futures settlement price, as in the case of XIV. In theory, that would reduce the funds’ vulnerability to sophisticated investors anticipating how its rebalancing could impact futures prices, according to analysts.

XIV’s vulnerability to investors trying to trade volatility futures in anticipation of the fund’s rebalancing needs may have created imbalances some analysts believe led to the fund’s undoing.

The new funds will limit their trading in volatility futures to no more than 10% of the volume during a given rebalancing period, and possibly extend the daily rebalancing period if it finds the market unusually volatile.

That would “go a long way to addressing the XIV-type situation,” said Matt Thompson, managing partner at Chicago-based investment adviser Thompson Capital Management, which specializes in volatility trading, and plans to use the new ETFs.

A debut would come in the midst of a months-long period where worries over a hawkish pivot by the Federal Reserve and geopolitical certainty stemming from Russia’s invasion of Ukraine have kept markets choppy.

The adoption of these products can often “pick up sharply after market drawdowns when volatility spikes,” said Anand Omprakash, head of derivatives quantitative strategy at Elevation Securities.

The rise of retail traders as a force in markets may also boost demand for the products, analysts said, although some may not be eager to jump into volatility funds after getting hurt in the past.

“The audience is more limited than pre-Volmageddon, but growing again,” Finom’s Golden said.

(This story corrects paragraph 9 to make clear investor did not own XIV shares)

(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Chizu Nomiyama)