Short-Volatility Funds Are Being Flooded With Cash (VIX Evaporating)

by Anthony B Sanders
The SPX volatility index VIX is near an all-time low as The Federal Reserve attempts to raise their target rate and unwind their $4.46 trillion balance sheet. The question remains as to how further rate increases and balance sheet unwinding will impact equity volatility.
(Bloomberg) Exchange-trade products betting that volatility will sink lower have never been more popular.
Even as the CBOE Volatility Index plunges to its lowest on record and U.S. stocks march to fresh highs, investors have continued to give the short-volatility trade their vote of confidence this year. With $2.4 billion in assets, short volatility exchange-traded funds are backed by the most cash on record, according to data compiled by Bloomberg.
The funds’ meteoric rise is to some degree a bet that the U.S. stock market will keep rising, since the VIX and S&P 500 move in opposite directions about 80 percent of the time. With the S&P 500 up 16 percent and at its highest on record, the $1.1 billion VelocityShare Daily Inverse VIX ETN has surged 141 percent, heading toward its best yearly performance in five years.
For now, the volatility bears have the momentum. Inverse VIX funds have nearly tripled in size this year alone. The amount of assets tracking short-volatility products rose above that of their long-volatility counterparts for the first time in two years in the third quarter.

In fact, regardless of direction, volatility itself is an in-demand asset class. The popularity of volatility products far outweighs that of other prominent corners in the U.S.-listed ETF market. With $4.6 billion in assets, they are larger than funds tracking any single European country, other than Germany. They also have more assets than those tracking all frontier markets and all ESG (environmental, social and governance) strategies combined.

However, despite the growth and the stellar returns, it’s unlikely most short-volatility investors have stuck around to see all of their triple-digit profit. Because of the funds’ structure, holding periods tend to be as short as a few days or even just a few hours.
With Central Banks practicing volatility suppression (monetary easing), the equity volatility index is near all-time lows (under 10)

Here is the VIX volatility surface.

For the TYVIX (10 year Treasury note volatility), it remains near the all-time low.