Volatility Could Be GameStop Crowd’s Next Losing Bet – GameStop mania may be over, but the ripples continue weeks later as newly minted retail traders flirt with various objects of affection. There were silver, marijuana stocks and dogecoin. Some observers are now pointing to an exchange-traded product that tracks volatility as a likely beneficiary of crowd behavior.
The ProShares Ultra VIX Short-Term Futures ETF, which carries the ticker symbol UVXY, might be the worst investment of them all because it isn’t really meant to be one.
“These products are expected to go to zero,” said Scott Nations, an expert on options and volatility and president of Nations Indexes.
The fund has been around since 2011, but swelled this week to its largest value ever, more than $2.5 billion in assets. This is despite the fact that its price has dropped by more than 99.99% over that time, sending about $5 billion of investors’ cash to money heaven. The fund gives investors 1.5 times exposure to futures contracts on the Cboe Volatility Index, or VIX. That index reflects how choppy purchasers of options on the S&P 500 think the market will be over the following month.
At the moment, those futures are sharply in contango, which means prices are higher for more distantly expiring ones. While the VIX itself is fairly elevated now at about 22, futures contracts expiring in March are above 25 and those expiring in April are at about 28. To maintain their objective, owners of volatility ETFs effectively are daily sellers of the cheaper contracts and buyers of the more expensive ones, steadily eroding their value.
“And then a product like UVXY, which is levered, makes it even worse,” Mr. Nations said.
Day traders were emboldened last month by the fact that a buying stampede caused huge losses for hedge funds making the opposite bet in a short squeeze. Unlike GameStop or even a finite commodity such as silver, though, rushing into a fund that can create more units and is backed by a purely financial product shouldn’t affect its price. The one exception might be if there is just so much demand that it becomes too risky or undesirable for the fund’s sponsor to create more units. When that has happened in the past, the crush of demand has sometimes caused units to trade well above their net asset value. Last year an unlisted note that returned the leveraged inverse value of natural-gas futures surged 60-fold because of that effect. But, just like paying $400 for GameStop, the trade only works if you can quickly find a greater fool.
And then there is the possibility that stock-market volatility spikes because of something unexpected. A year ago UVXY was fetching a little over $10 and within a month it had shot as high as $135 as the Covid-19 crisis rocked the economy. Now it is back below $10.
That performance shows the narrow usefulness of such a product. Someone who had accumulated a large stock portfolio and was worried about Covid-19’s harm to the economy would have been able to sleep at night during last year’s brutal bear market holding a small position in UVXY. But for a young trader without a lot of assets and many years to recover from a market calamity, a volatility-linked note is pure speculation and probably a lousy bet.
