Can Volatility ETFs & VIX Futures Blow-Up The Stock Market?
Vance Harwood | Apr 05, 2012 05:23AM ET
The VIX Futures market has been on a bit of a tear—driven by inflows into volatility ETFs like Barclays’ rebalancing for inverse and leveraged funds could spur additional contract purchases.These demands are proportional to the assets under management, which should roughly track the open interest on volatility contracts.
The chart below shows the open interest on the short term VIX futures compared to the VIX index and SPX (it uses the non-logarithmic scale on the right).The dashed vertical lines mark the major volatility peaks of the last 4 years.
Besides the spooky correlation between the log futures open interest and SPX, the other thing to note is that the future’s open interest stayed flat or dropped during these market crashes/corrections.The inverse and leveraged volatility funds were not a factor before 2011, but during the 2011 correction XIV and TVIX were running combined daily volumes in the tens of millions so the last correction included some contributions from them.
This data shows that historically the demand for VIX futures does not spike with the VIX, but rather the spike marks the beginning of decline in the short term demand for futures.
As the VIX futures market grows I expect we will see disruption of some historical price relationships, but I think the answer to the big question—will they crash the market, is no.
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