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Opinion
Jared Dillian

Volatility Funds Worked as Intended. That's the Problem

Veteran traders know these strategies can mint money for years. They also know the gains can evaporate in one day.
Rising volatility is wrecking havoc on Wall Street.

Rising volatility is wrecking havoc on Wall Street.

Photographer: Daniel Leal-Olivas

The standard response to the collapse -- and in some cases, the liquidation -- of inverse volatility exchange-traded products has been, “Why the heck do we need these things?”

It’s a reasonable question. The problem with ETFs is that many of them appeal to retail investors, but are really meant for institutions. The VelocityShares Daily Inverse VIX Short-Term ETN, better known by as XIV, and the ProShares Short VIX Short-Term Futures, or SVXY, are examples. Shorting volatility isn’t supposed to be easy. In the old days, you had to actually sell options and dynamically hedge them. It involved some computer software and low transactions costs -- which were not typically available to retail investors.