3 Market Surprises Impacting ETFs

May 10, 2017

Predicting market action is fraught with challenges. Often the market takes unexpected turns, delivering investors with surprising ETF performances. So far this year, there have been a few “surprises” worth noting.

Volatility Is Very, Very Low

So far in 2017, market volatility has been historically low any way you measure it. The CBOE VIX Index is sitting below the 10 mark—a level that’s lower than 99%-plus of all its closing prices since 1990, according to ConvergEx’s Nick Colas. That it’s so low has people wondering whether it could actually go to zero. CBOE’s head Ed Tilly says it cannot, by the way. (CBOE owns ETF.com’s parent company, Bats Global Markets.)

If you measure volatility from the perspective of the S&P 500, we should have already seen at least 19 days of 1%-or-wider moves so far in 2017, based on historical norms, Colas says. But year-to-date, the S&P 500 has only moved 1% or more in just three days.

“It’s not your imagination. U.S. equity markets are much calmer than usual,” Colas said. These are definitely strange days.

From an ETF perspective, there are 19 volatility exchange-traded products on the market today. Most of them are either leveraged or inverse, but the biggest of these strategies is not. The iPath S&P 500 VIX Short-Term Futures ETN (VXX), with $820 million in assets, tracks an index with exposure to futures contracts on the VIX with average one-month maturity, and exposure resets daily.

VXX is down more than 45% year-to-date, bringing its one-year results to a loss of more than 77% in 12 months. Despite the decline, investors have poured $163 million in fresh net assets into this exchange-traded note so far in 2017. 

“The upshot is that actual U.S. equity market volatility should begin to rise (at least modesty) in the coming weeks,” Colas said. “If you buy our construct that volatility follows cycles, then we should be at the trough of one right now. That should cause a pullback in stocks, but it does not portend a subsequent meltdown or melt-up, for that matter.”


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