Investors with Losses in VIX Have Options


Have you suffered losses due to investments with inverse volatility-linked exchange-traded funds (ETFs) when the Chicago Board Options (CBOE) Volatility Index (VIX) Index skyrocketed? If your broker or brokerage firm sold you inverse volatility-linked exchange-traded funds (ETFs) without disclosing the risks of the fund, Erez Law may be able to help you recover your losses.

Inverse volatility-linked ETFs return a profit when the market experiences periods of low volatility. This is an extremely complex and risky security that is not suitable for the average investor, hedging a bet that the market will remain relatively stable. Some inverse ETFs are designed to provide investors with positive returns when the VIX falls, and inversely negative when the VIX rises. The VIX Index is referred to as a fear gauge for the market.

According to FINRA, “the VIX is not based on actual price fluctuations experienced on a given day (or over some other timeframe) but instead reflects an expectation of volatility over the next 30 days as implied by options prices.” Historically, the VIX is elevated in times of market distress and lower during normal market conditions, and it is negatively correlated to the broader stock market. And thus, many volatility-linked ETPs are highly likely to lose value over time, according to FINRA.

“Historically, the VIX hovers near 20, with its long-term median of 18. When the VIX drops below that, the market is considered to be undergoing an “abnormal” period of calm, while levels above 18 generally indicate higher market stress,” according to FINRA. “For context, the VIX Index soared to around 80 in 2008 in the midst of the financial crisis. In July 2014, the VIX Index fell to about 10. More recently, the VIX Index has hovered between 14 and 16.”

“If you’re an individual investor, the VIX is a great sentiment indicator of the market,” said Callie Bost, a listed derivatives analyst at TABB Group, a financial markets research and advisory firm. “You can watch the stock market and say, ‘This is what traders are thinking right now, but you can look to the VIX and say, ‘This is what traders think of the market environment one month from today.’”

The XIV was designed to produce opposite returns of the VIX, and when the volatility index shot through the roof back in February 2018 — a record 118 percent — the XIV went through the floor, down a devastating 90 percent. The ensuing negative feedback loop of selling is believed to have seriously exacerbated market turmoil. XIV is designed to produce opposite returns of the VIX, and when the volatility index increased by 188% on February 5 and the volatility index jumped to 38.3 (the highest level in several years), the XIV dropped. On February 6, 2018, stock indexes fell 10%, however, VelocityShares Daily Inverse VIX ETN dropped more than 90% down, from $99 to $7.35. On February 9, 2018, XIV closed at $5.38.

Credit Suisse announced that it would liquidate and stop trading VelocityShares Daily Inverse VIX Short-Term Exchange Traded Notes and close the fund. Investing in VelocityShares Daily Inverse VIX Short-Term ETNs may have been unsuitable for inexperienced investors who did not understand the risks associated with these investments.

In February 2018, the stock market faced volatility and the VIX rose rapidly, causing some ETFs to lose value:

  • iPath S&P 500 VIX Short-Term Futures ETN (VXX)
  • ProShares Short VIX Short-Term Futures (SVXY)
  • ProShares Ultra VIX Short-Term Futures (UVXY)
  • ProShares VIX Short-Term Futures (VIXY)
  • VelocityShares Daily 2X VIX Short-Term ETN (TVIX)
  • VelocityShares Daily Inverse VIX Short-Term ETN (XIV)

In May 2018, FINRA warned investors about volatility investing. According to FINRA, “investors could risk major losses if they trade volatility-linked ETPs without fully understanding how they work. These products are generally not designed to be used as buy-and-hold investments—and while they can generate eye-popping gains (a number of inverse volatility-linked ETPs had returned over 180 percent in 2017), they can also quickly lose some or all of their value in a very short time.”

A broker must have reasonable grounds for each recommendation made to investors considering such factors as the customer’s other securities holdings, financial situation, and risk tolerance. In addition, before a firm offers a security to its customers, the firm must conduct due diligence, investigating the facts surrounding the security, to confirm that it is suitable for any customer of the firm. The suitability of an investment for a particular individual is at the center of the investment process and one of the key duties owed by a firm and its broker to the customer. A firm may be held liable for its failure to recommend suitable investments to its customers.

Pursuant to FINRA Rules, member firms are responsible for supervising a broker’s activities during the time the broker is registered with the firm. Therefore, brokerage firms across the country may be liable for investment or other losses suffered by its customers.

Erez Law represents investors in the United States for claims against brokers and brokerage firms for wrongdoing. If you have experienced investment losses, please call us at 888-840-1571 or complete our contact form for a free consultation. Erez Law is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies on a contingency fee basis.

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Author: Jeffrey Erez

The founder of Erez Law, Jeffrey Erez, focuses exclusively on securities arbitration and litigation. Mr. Erez passionately believes in representing aggrieved investors and obtaining justice for his clients through litigation.