ProShares has reduced the degree of exposure underlying its two VIX-related ETFs following rapid, large swings in the products’ values during the equity market sell-off in early February.
The ProShares Short VIX Short-Term Futures ETF (SVXY US) closed down 96% on 6 February 2018.
The ProShares Ultra VIX Short-Term Futures ETF (UVXY US) previously provided twice the daily performance of the S&P 500 VIX Short-Term Futures Index, while the ProShares Short VIX Short-Term Futures ETF (SVXY US) provided the unleveraged inverse daily return on the same index.
Going forward, UVXY will provide one and one-half times (1.5x) the daily performance of the same index, while SVXY will provide one-half the inverse (-0.5x) daily return of the index.
The S&P 500 VIX Short-Term Futures Index tracks the performance of futures contracts based on the VIX index – also known as the ‘fear index’.
The VIX index represents the implied volatility of US equities derived from option pricing on the S&P 500 Index and is a measure of the market’s expectation of stock market volatility over the next 30-day period.
While the performance of the S&P 500 VIX Short-Term Futures Index and the VIX index do differ (due to factors such as rolling costs incurred on the futures contracts), the former acts as an approximate proxy for the latter.
During 2017, the US equity market quietly chugged higher, causing volatility and the VIX to reach record lows. On 2 February 2018, the VIX was trading between a range of 14 -17.
However, US stocks suffered their worst fall in over six years on 5 February brought on by concerns over higher interest rates. The Dow Jones Industrial Average lost 4.6% and the S&P 500 tumbled 4.1%.
The sell-off caused a spike in the VIX which traded towards 50 as markets opened in the US on 6 February.
The rapid jump in the VIX, especially from such a low base, led to substantial losses in short VIX ETFs; the ProShares Ultra VIX Short-Term Futures ETF closed down 96% by the end of trading on 6 February 2018.
The rapid losses led to trading in SVXY, and other short VIX ETFs, to be halted and short sell restrictions to be imposed on these products.
The extreme moves in these funds led Credit Suisse to announce the closure of its short-term inverse VIX ETN. ProShares, however, released a statement saying its product would remain open as usual, noting it acted “consistent with its objective and reflected the changes in the level of its underlying index”.
While the fund’s consistency with its objective may be true, the sharp unwinding of short volatility positions has highlighted the inherent risks in such strategies to investors. The reduction in these product’s exposures may be ProShares’ means of mitigating the risk of a similar event occurring in the future, helping to entice investors back to these vehicles.