The so-called “fear gauge,” the VIX has been on a downward spiral for several years, continually hitting new lows and calling into question its very existence. From Bloomberg:
The CBOE Volatility index, the pulse of market fear measuring the implied volatility of the S&P 500, is becoming more erratic because of the proliferation of exchange-traded products, according to Pravit Chintawongvanich, an equity derivatives strategist at Macro Risk Advisors. These products offer investors exposure to VIX futures and magnify the speed and size of movements in the VIX itself.
“The big rebalance orders associated with VIX exchange-traded products means they are going to exacerbate the daily move in VIX futures, which could in turn impact the VIX,” Chintawongvanich wrote in a note to clients. “So when volatility spikes, it spikes harder, and when volatility collapses, it collapses harder.”
Whether it’s due to overly aggressive central bankers, increased regulation, ETPs, passive investing, or other factors, one thing is for sure: the VIX looks broken, and probably will never be fixed.
The iPath S&P 500 VIX Short Term Futures TM ETN (NYSE:VXX) rose $0.11 (+0.34%) to $32.39 per share in premarket trading Friday. The largest exchange traded product tied to the VIX, with nearly $1.4 billion in assets under management, has plunged nearly 60% year-to-date.