The long-awaited pullback following soaring equity markets may have taken its first step this week and low volatility ETFs have been impacted.
Investors are concerned about inflation and rising interest rates, which have pushed up bond yields while stocks sink.
Low vol ETFs have seen outflows of $37 million in the last few days and further outflows are anticipated. Average returns are minus 5% so far this year.
The news follows the S&P 500’s rise of 20% in the last year, yet the bellwether index is now in negative territory year to date at around minus 0.8%.
Donald Trump frequently claimed the stock market highs this year – more than 80 record closing levels – were partially down to his pro-business stance and tax reform, although analysts knew the so-called Trump rally would not be sustainable.
The FTSE 100 is also down around 4.5% year to date. In Europe too, the Eurostoxx 50 index has been dragged into negative territory. The MSCI World is still hovering at the break even point after gaining as much as 7% earlier this year.
Volatility index soars
The VIX index, which measures volatility, has spiked again to 49 points – its highest level in many years. Starting around 9 points in January, it rose to more than 37 on Monday before reaching new heights on Tuesday.
Its spike has shocked many investors in inverse volatility ETPs. The ProShares’ Short Vix short-term futures ETF Fund has dropped 90% this year as the VIX spiked, and most of the fall came this week. It had risen around 75% last year.
The Velocityshares Inverse Vix ETN has also dropped around 89% from the start of the year following market uncertainty this week. Trading has been suspended in both funds.
Industry participants have questioned whether certain products would have to be liquidated.
Consequently BlackRock has warned against the wild swings in these kinds of products, although not mentioning them explicitly, saying that leveraged ETPs do not act like ETFs under stress.