ETF Securities Equity Research: Is VIX the next market blunder?
Highlights
The VIX index is currently demonstrating a complete absence of fear. In the context of current world affairs and political instability, we believe this is demonstrating a worrying complacency amongst investors.
Shorting the VIX is a dangerously crowded trade. The risk of market dislocation increases as interest rates rise.
The VIX and equity valuations are unusually closely correlated, implying that investors are buying equities due to their low volatility, and are comfortable with high valuations as a result. As we believe the VIX is likely understating risk, this puts equity investors in a vulnerable position.
Changing course after failure
The VIX index, coined as the fear index, is currently demonstrating a complete absence of fear. Except for the occasional spike upwards this year it has been exceptionally low. The average level of VIX for this year sits in the lowest 5% in history (since 1991) with the current level being in the lowest 1%. Furthermore, the low of 9.75 this year was the 5th lowest in history, a level last achieved in late 1993. In the context of current world affairs and political instability, we believe this is demonstrating a worrying level of complacency amongst investors.
Recent spikes in the VIX highlight how this complacency can leave investors going short the VIX index vulnerable. The spike on 17th May is a good example. The VIX rose 46% from 10.6 to 15.6 overnight on the back of revelations that Donald Trump asked ex FBI Director James Comey to drop the FBI investigation into Russian involvement in the US Presidential elections.
From a superficial perspective, the low VIX suggests investors’ perception of future volatility is sanguine. We believe the VIX is understating risk. Our model of the VIX, which uses a combination of the Global Financial Stress Index (GFSI) and the US Economic Policy Uncertainty Index (detailed in VIX & Tax promises lulling equity investors into a false sense of security) highlights a widening deviation between our model results of the VIX and the actual VIX index. Our model suggests the VIX should be closer to 15, not its current level of 10.6. Thus, our model indicates that market perception of risk should be much higher. Perversely, we believe this disparity has been partly due to unstable macro events. A broad rise in the S&P500 is masking unusually low correlation between market sectors and individual stocks. This does not fully explain why the VIX has been deviating from our model, as this is a more recent phenomenon.
Since 2013 a worrying trend has arisen amongst a group of investors who are shorting the VIX. The subdued level of the VIX has likely been driven by investors, on the hunt for yield, motivated by years of loose monetary policy. The steep term structure gives these investors who are short the VIX a yield.
According to the CFTC (Commodity Futures Trading Commission), investors are holding record short positions – over 3x standard deviation from its historical range relative to long positions – suggesting shorting the VIX is an increasingly crowded trade.
We question how long this can last given the VIX is so low. We also remain concerned that an unwind of this trade will hurt, potentially prompting a VIX short squeeze and the resultant higher volatility prompting a risk asset sell-off. Timing a potential shift in sentiment is difficult although shorting the VIX will become increasingly less attractive every time the US Federal Reserve (FED) increases interest rates. The short VIX yield will therefore look increasingly less attractive as yields in other assets increase with rising interest rates. Conversely, an unexpected sharp move in equities or a significant political event could also precipitate an unwind in short VIX positioning.
On the other side of this trade are investors who see record lows in the VIX as an opportunity to buy long positions, fearing that volatility may rise. As illustrated by the shares outstanding from a selection of ETFs, short VIX ETF shares have been falling recently while long VIX ETF shares have risen sharply. This trend emerged not long after the first FED rate hike in December 2015.
The challenge in owning long VIX products is their ability to track the index. As the term structure is steep, it means as the products switch from one contract to the next, there is a cost incurred, meaning over time there is an increasing decay in relative performance. The low measures of the VIX does have implications for the equity market. Historically there has been a poor relationship between the VIX and price/earnings (PE) valuations in the US, with a regression between of the two demonstrating an R-squared of 0.1 since 1990. However, over the last 2 years the R-squared his risen sharply to 0.58, suggesting a much closer correlation between the VIX and PEs.
The worrying aspect in the relationship is that the further the VIX falls, the higher valuations are, implying that investors are buying equities due to their low volatility, and are happy paying higher valuations to do so. As we believe the VIX is likely understating risk, this puts equity investors in a vulnerable position.
In short, we believe equity investors are becoming too complacent, valuations are high at a time when margins are likely to be squeezed further, whilst many promised corporate tax cuts may not come to fruition this year. Furthermore, we believe the VIX is lulling some investors into a false sense of security when holding equities. These factors leave equity markets vulnerable to a sell-off in the event of further interest rate rises and continued lack of clarity from the US political administration.
For more information contact:
ETF Securities Research team ETF Securities (UK) Limited T +44 (0) 207 448 4336 E info@etfsecurities.com
Important Information
This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).
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What are real-world assets and why do we need tokenization?
Imagine owning a slice of a skyscraper or a piece of fine art with just a few clicks. Tokenization, the act of converting ownership rights to real-world assets (RWAs) into tradable tokens, has surpassed $10 billion in on-chain value, unlocking global 24/7 access to once-exclusive markets with liquidity, efficiency, and yield. Find out how it works.
Research Newsletter
Each week the 21Shares Research team will publish our data-driven insights into the crypto asset world through this newsletter. Please direct any comments, questions, and words of feedback to research@21shares.com
Disclaimer
The information provided does not constitute a prospectus or other offering material and does not contain or constitute an offer to sell or a solicitation of any offer to buy securities in any jurisdiction. Some of the information published herein may contain forward-looking statements. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties and that actual results may differ materially from those in the forward-looking statements as a result of various factors. The information contained herein may not be considered as economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content hereof.
Invesco BulletShares 2030 EUR Corporate Bond UCITSETF EUR Acc (BSE0 ETF) med ISIN IE000I25S1V5, försöker följa Bloomberg 2030 Maturity EUR Corporate Bond Screened-index. Bloomberg 2030 Maturity EUR Corporate Bond Screened Index följer företagsobligationer denominerade i EUR. Indexet speglar inte ett konstant löptidsintervall (som är fallet med de flesta andra obligationsindex). Istället ingår endast obligationer som förfaller under det angivna året (här: 2030) i indexet. Indexet består av ESG (environmental, social and governance) screenade företagsobligationer. Betyg: Investment Grade. Löptid: december 2030 (Denna ETF kommer att stängas efteråt).
Den börshandlade fondens TER (total cost ratio) uppgår till 0,10 % p.a. Invesco BulletShares 2030 EUR Corporate Bond UCITSETF EUR Accär den billigaste och största ETF som följer Bloomberg 2030 Maturity EUR Corporate Bond Screened index. ETFen replikerar det underliggande indexets prestanda genom samplingsteknik (köper ett urval av de mest relevanta indexbeståndsdelarna). Ränteintäkterna (kupongerna) ackumuleras och återinvesteras.
Invesco BulletShares 2030 EUR Corporate Bond UCITSETF EUR Acc är en mycket liten ETF med tillgångar på 6 miljoner euro under förvaltning. Denna ETF lanserades den 18 juni 2024 och har sin hemvist i Irland.
Produktbeskrivning
Invesco BulletShares 2030 EUR Corporate Bond UCITSETFAccsyftar till att ge den totala avkastningen för Bloomberg 2030 Maturity EUR Corporate Bond Screened Index (”Referensindexet”), minus avgifternas inverkan. Fonden har en fast löptid och kommer att upphöra på Förfallodagen.
Referensindexet är utformat för att återspegla resultatet för EUR-denominerade, investeringsklassade, fast ränta, skattepliktiga skuldebrev emitterade av företagsemittenter. För att vara berättigade till inkludering måste företagsvärdepapper ha minst 300 miljoner euro i nominellt utestående belopp och en effektiv löptid på eller mellan 1 januari 2030 och 31 december 2030.
Värdepapper är uteslutna om emittenter: 1) är inblandade i kontroversiella vapen, handeldvapen, militära kontrakt, oljesand, termiskt kol eller tobak; 2) inte har en kontroversnivå enligt definitionen av Sustainalytics eller har en Sustainalytics-kontroversnivå högre än 4; 3) anses inte följa principerna i FN:s Global Compact; eller 4) kommer från tillväxtmarknader.
Portföljförvaltarna strävar efter att uppnå fondens mål genom att tillämpa en urvalsstrategi, som inkluderar användning av kvantitativ analys, för att välja en andel av värdepapperen från referensindexet som representerar hela indexets egenskaper, med hjälp av faktorer som index- vägd genomsnittlig varaktighet, industrisektorer, landvikter och kreditkvalitet. När en företagsobligation som innehas av fonden når förfallodag kommer kontanterna som fonden tar emot att användas för att investera i kortfristiga EUR-denominerade skulder.
ETFen förvaltas passivt.
En investering i denna fond är ett förvärv av andelar i en passivt förvaltad indexföljande fond snarare än i de underliggande tillgångarna som ägs av fonden.
”Förfallodag”: andra onsdagen i december 2026 eller sådant annat datum som bestäms av styrelseledamöterna och meddelas aktieägaren
Det betyder att det går att handla andelar i denna ETF genom de flesta svenska banker och Internetmäklare, till exempel DEGIRO, Nordnet, Aktieinvest och Avanza.
Since President Trump appointed Mark Uyeda as acting SEC chair two months ago, many investigations into crypto businesses have been dropped, as the SEC moves away from regulation by enforcement and works to create a framework for digital assets. As regulations become clearer and news flow turns more positive, crypto prices—which dropped sharply this week—should begin to better reflect the new regulatory landscape in the US.
We believe this regulatory shift could ultimately help trigger the next leg of the current bull run, as investors better understand the significance of regulatory clarity and seek to acquire bitcoin and altcoins at what we believe are currently very favorable levels.
Market Highlights
SEC Dismisses Crypto Enforcement Actions
The SEC dropped its enforcement actions against crypto-related companies Kraken, Consensys, and Cumberland DRW.
This indicates a shift in SEC’s regulatory approach, favoring clearer guidelines over enforcement actions. Such a pivot could foster a more predictable environment, encouraging innovation within the sector.
Banks to Engage in Crypto Activities
The FDIC has rescinded previous guidelines which prevented financial institutions from engaging with crypto activities without prior sign-off.
By removing bureaucratic hurdles, banks may more readily offer crypto-related services, potentially leading to broader adoption and integration of digital assets.
Bitcoin ETFs Inflow Streak Surpassed $1 Billion
US spot Bitcoin ETFs have recorded a 10-day inflow streak exceeding $1 billion marking the longest such streak in 2025.
This underscores growing institutional and retail investor confidence in Bitcoin as an asset class that helps increase market stability and possibly paving the way for the approval of other crypto-based financial products.
Market Metrics
All NCITM constituents had negative performance last week, with XRP (-10.8%) and UNI (-10.7%) seeing the steepest declines. ETH also experienced a sharp drop (-9.1%), contributing to NCITM’s underperformance relative to BTC (-2.9%). The NCITM -4.2% decline reflects a broader risk-off sentiment in the crypto market, as investors reassess their positions amid ongoing macroeconomic uncertainties.
NCITM (-4.2%) extended its underperformance last week, deepening year-to-date losses. Traditional indices like the S&P 500 (-1.5%) and Nasdaq 100 (-2.4%) saw smaller declines. The gap between crypto and other risk assets continues to widen, while gold has emerged as the top performer in 2025, gaining nearly 20% amid ongoing macroeconomic uncertainties. This trend highlights a growing risk-off sentiment, with investors shifting toward defensive assets and away from high-volatility investments.