Much of the money flowing into
volatility ETFs likely comes from professional investors who are using
them to hedge their long bets and may be jumping in and out of them.
George Soros' hedge fund, Soros Fund Management LLC, for example, held shares of the iPath S&P 500 VIX Short-Term Futures ETN at the end of the first quarter, according to the fund's quarterly regulatory filings.
But those plays come at a price, especially for retail investors who tend to keep positions for longer periods of time.
"Retail investors tend to use these things as a gambling product," said Cory Burnell, chief investment officer of California-based BluePrint Wealth Partners, while institutional investors may employ a more sophisticated hedging strategy, .
"If you're betting on a spike in volatility, you'd better be right pretty quickly," Burnell said. "If you're wrong, you're going to get eaten up. It's an expensive bet."
That is because these funds are constantly replacing expiring futures contracts with new ones. When the new contracts are more expensive than the ones being sold (a situation called contango in the futures markets), the funds lose money on both ends of that transaction.
Contango is currently at about 8 percent, which means that investors buying a long VIX fund would need the VIX to rise more than 8 percent to hit a positive return.
In addition, the funds cost more than a typical stock or bond exchange-traded fund, with the VXX ETF, for example, charging 0.89 percent of assets per year in management fees.
"People have a higher fear of what's going to happen than what actually happens and therefore they're willing to pay for insurance," said Mike Venuto, chief investment officer at Toroso Investments. But he noted, "Volatility is not something that's sustainable."
George Soros' hedge fund, Soros Fund Management LLC, for example, held shares of the iPath S&P 500 VIX Short-Term Futures ETN at the end of the first quarter, according to the fund's quarterly regulatory filings.
But those plays come at a price, especially for retail investors who tend to keep positions for longer periods of time.
"Retail investors tend to use these things as a gambling product," said Cory Burnell, chief investment officer of California-based BluePrint Wealth Partners, while institutional investors may employ a more sophisticated hedging strategy, .
"If you're betting on a spike in volatility, you'd better be right pretty quickly," Burnell said. "If you're wrong, you're going to get eaten up. It's an expensive bet."
That is because these funds are constantly replacing expiring futures contracts with new ones. When the new contracts are more expensive than the ones being sold (a situation called contango in the futures markets), the funds lose money on both ends of that transaction.
Contango is currently at about 8 percent, which means that investors buying a long VIX fund would need the VIX to rise more than 8 percent to hit a positive return.
In addition, the funds cost more than a typical stock or bond exchange-traded fund, with the VXX ETF, for example, charging 0.89 percent of assets per year in management fees.
"People have a higher fear of what's going to happen than what actually happens and therefore they're willing to pay for insurance," said Mike Venuto, chief investment officer at Toroso Investments. But he noted, "Volatility is not something that's sustainable."
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