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Volatility ETFs’ crazy churn

Two volatility ETFs (VXX and UVXY) are having almost half of the trading volume in the world’s largest ETF (SPY). How come?


First, the facts:



SPY is heavily traded (19% of assets daily turnover) compared to IVV (also referring to the S&P 500).

But then come the volatility ETFs. Tiny VIXY (assets $145m) turns itself over 2x per day.

Why are those long-volatility ETFs so popular, given they are wasting assets in an environment with a steep volatility-futures curve (source VixCentral):



(Ceterus paribus short-term long-vola ETF’s will suffer monthly roll-losses of 11% or roughly 0.5% per trading day)

The most likely explanation is that volatility-ETFs offer leverage without the need for margin:





On August 9, 2012, SPY had a trading range of 60bps. VXX offered 220bps, topped by UVXY with 440bps.

Tiny moves in the equity market can be amplified by using volatility ETFs (not that I would endorse this). It’s leverage without leverage for the day trader.



Lighthouse Investment ManagementAlexander Gloy is founder and president of Lighthouse Investment Management.

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About Alex Gloy
Alex Gloy
Alex Gloy: Founder, President and Chief Investment Officer of Lighthouse Investment Management Born in Hamburg, Germany, Mr. Gloy started his financial career as a trainee in the Deutsche Bank Apprenticeship Program at the Hamburg Stock Exchange. He graduated from the University of Fribourg (Switzerland) with an MBA in 1994. Following his MBA he joined Credit Suisse, Zurich, in European Equity Sales. Mr. Gloy then served as the German Equity Market Strategist before heading the European Equity Research Team in Credit Suisse Private Banking. After moving to New York in 1999 he worked in Swiss and European Equity Sales. Mr. Gloy spent the last three years at Sal. Oppenheim as Head of their Swiss Equity Sales Desk. From 1994 to 1998 he continued to work with his Alma Matter and its Institute of Finance, preparing students for their final Finance exam.
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