Practical Applications of Trading Volatility: At What Cost?

Abstract

Exchange-traded products (ETPs) linked to VIX short-term futures indices are popular among retail investors, even though they consistently lose money over time. Don’t be fooled by their popularity. These VIX ETPs are simply not good buy-and-hold investments. This is the advice of Robert E. Whaley, author of Trading Volatility: At What Cost? and creator of the CBOE Market Volatility Index (VIX). Launched in 1993, VIX is a key measure of market expectations of near-term volatility expressed by Standard & Poor’s 500 stock index option prices. It has become the market’s most closely watched “fear index.” In this Practical Applications report, Whaley tells us why these VIX-linked ETPs are not appropriate for long-term investment. He identifies inverse opportunities and alternatives for investors who do want to buy and hold VIX ETPs. Whaley is the Valere Blair Potter Professor of Management and Director of the Financial Markets Research Center at the Owen Graduate School of Management, Vanderbilt University. His Journal of Portfolio Management article has gained attention in the broader media. Barron’s recently featured it in VIX Creator: Volatility ETPs ‘Virtually Guaranteed to Lose Money.’