As pundits look for things to blame, many have fixated on the VIX linked ETFs and ETNs. I am very familiar with them. I wrote about the "Golden Goose" strategy of buying the short VIX funds almost a year ago. I also wrote about the risk of an Acceleration Event in "What Could Cause VIX to Erupt?"
I view these funds and strategies as tool. There are risks and rewards. What I did not do was trivialize them like some people are choosing to do now.
If you blame them for Monday then you are admitting that these funds, XIV and SVXY in particular were to blame for a large part of Monday's selling pressure (especially the erratic trading overnight). I agree with that.
But you also have to admit that the accumulation of assets in volatility selling strategies also impacted the market. In many ways, the laws of physics apply to markets and for every action there is an equal and opposite reaction. I believe that the accumulation of assets in these vehicles suppressed volatility (they sell volatility after all). That suppressed volatility allowed stocks to rise higher than they would have otherwise. Whether it allowed higher P/E's to be justified or allowed various cross-asset strategies to be bigger than they would because of low volatility can be debated, but I think it is foolhardy to pretend that the vol selling strategies didn't help markets on the way up.
Why the reluctance to admit that they impacted markets on the way up? Why the vehemence toward them in regards to current volatility?
Which brings me to my last point, how can you blame them for yesterday?
The Dow Jones Industrial average dropped over 1,000 points and the VIX based ETFs and ETNs were a fraction of their size on Monday (XIV no longer functions as an ETN). How can you blame them for that too?
The reality is that the ETFs and ETNs were only the tip of the iceberg in terms of volatility selling strategies. ETFs and ETNs have the 'advantage' of being highly visible and providing investors with a wealth of up to date information. I typically view ETFs and ETNs as important, not just because of their size, but because they likely reflect underlying investor trends that are hard to spot or measure.
So, volatility selling is impacting markets, but it isn't just these ETFs and ETNs and volatility selling had just as much impact on the markets on the way up as it is having on the way down - pundits just liked that impact.
