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.
Alexander Gloy is founder and president of Lighthouse Investment Management.
Tags: Alexander Gloy,Lighthouse Investment
