VIX Note Used to Ride Volatility Lower Shows Fear Ahead

When volatility soared over the last three years, traders would often profit by buying up shares of a popular exchange-traded note that bets on the gauge to inevitably fall. This time, they’re being more cautious.

Three weeks after the VIX, a measure of expected price swings on the Standard & Poor’s 500 Index, soared to 40.7 on Aug. 24, inflows into the VelocityShares Daily Inverse VIX Short-Term ETN, known as XIV, have dried up. That’s even though the VIX remains about 70 percent higher than its average for 2014.

Over the last six trading days, investors have put an average of $3.1 million daily into the ETN, which has $1.31 billion in market value. Volume on XIV has also declined, with 22.7 million shares trading on Friday, compared with its 15-day moving average of 45 million shares, according to data compiled by Bloomberg.

“People have equated investing in XIV to picking up nickels in front of a steamroller,” said Eric Balchunas, a senior exchange-traded-fund analyst at Bloomberg Intelligence. “You could say people are starting to respect the steamroller.”

The recent gain in the Chicago Board Options Exchange Volatility Index, whose futures contracts the ETN tracks, stung holders of the security. XIV has dropped 15 percent since Aug. 24. Before that, it had more than quadrupled since its inception in 2010 through July, aided by a 44 percent drop in volatility.

While traders aren’t betting volatility will fall, they’re not eager to take the opposite viewpoint either. Over the three weeks ended Sept. 11, $656.8 million was pulled from the iPath S&P 500 VIX Short-Term Futures ETN, the biggest note that seeks to profit from a rise in VIX futures contracts.

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