Street’s rocky ride in 2018 — a level of chaos we’ve
not seen in quite some time — has everyday investors
fearing for their 401(k)s.
many times, panic can drive you into pretty risky deals.
The same applies to rushing into something you don’t
understand because your neighbor has a convincing story
on a hot new way to make money.
hear someone you know try to chat you up on the wonders
of trading the VIX?
Financial Industry Regulatory Authority is warning that
novice investors could lose more money than they might
expect if they trade complex, speculative products that
are designed to cash in on the market’s volatility.
who have complained to FINRA say they’ve lost six
figures on exchange-traded products that track
"volatility" as an asset.
caller we had heard from really lost everything,"
said Gerri Walsh, senior vice president of investor
education at FINRA, told me in a phone interview.
investor put virtually all of his family’s assets on a
was investing in an exchange-traded product that tracked
the inverse of the performance of futures on the Chicago
Board Options Exchange Volatility Index, or what’s
known as the VIX.
investor bought the product on margin — essentially
investing with borrowed money.
investment crashed, his money was gone and he owed so
much that he faces the possibility of having to mortgage
his house to pay off the margin debt.
FINRA noted, the specific VIX-related product he bought
no longer even trades.
not talking about your typical stocks and bonds. The
products are not buy-and-hold investments — and can be
fairly volatile themselves. Typically, investors are
tracking futures products or other derivatives pegged to
a so-called "fear index."
taking a significant risk and you need to understand
that," Walsh said. "There’s always risk
involved with these products."
times, she said, individuals are hearing about such
products through the financial news media and investing
on their own through online brokerage accounts. But
others say some brokers pushed the product, too.
Forbes contributor wrote an article last summer that was
titled: "Selling VIX Is Hitting Magazine Covers —
Should You Be Worried?"
popularity of such VIX-related products wasn’t hurt,
of course, by some eye-popping gains in the past.
inverse volatility-linked exchange-traded products had
returned more than 180 percent in 2017.
today, some novice investors might be attracted to
volatility-linked products, as we’re seeing more
swings in the stock market of late. But it’s an area
where individual investors need to move cautiously —
if at all.
Sowerby, managing director and portfolio manager for
Cleveland-based Ancora Advisors, noted that investors
have seen higher volatility this year — with two 10
percent corrections in 2018.
it’s nothing close to a 50 percent decline in the
market meltdown nearly 10 years ago. Volatility on Wall
Street was more extreme during the fall of 2008 and
early 2009, he said.
said volatility-linked products that bet on a decline in
market swings — not an uptick — were not a prudent
strategy for the longer-term individual investor.
when volatility or the VIX was at such historical
lows," Sowerby said.
VIX-related products enabled investors to profit when
volatility was low but then led to dramatic losses when
Wall Street ran into a major stock selloff in February.
so-called "fear gauge," as the VIX has been
called, has come under more scrutiny since the brutal
market sell-off in early February. The Dow Jones
industrial average lost more than 2,500 points or 9.75
percent in a two-week period.
Suisse Group AG’s VelocityShares Daily Inverse VIX
Short-Term ETN imploded in February’s market selloff,
losing nearly $2 billion in about 18 hours, according to
a Bloomberg report.
short volatility product, known as XIV, posted a 90
percent drop within hours, according to reports.
of market manipulation in the volatility-trading
universe have surfaced, including reports that the U.S.
Securities and Exchange Commission and Commodity Futures
Trading Commission will conduct an investigation into
some aspects involving the VIX benchmark.
will likely see a tsunami of lawsuits and FINRA
arbitration claims for burned investors in this product
and others like it," said Andrew Stoltmann, a
Chicago-based attorney who typically represents
investors who lost money.
it feels like Groundhog Day all over again,"
noted that such complex sorts of investments aren’t
suitable for 99 percent of retail investors.
unfortunately they were heavily sold to retail investors
across the United States. Brokers took a square peg in a
round hole approach to recommending these products,
similar to what we saw in 1999 with technology stocks
and other similar investments in the last 18
years," Stoltmann said.
VIX is not based on actual price fluctuations
experienced in a given day. Instead, the VIX reflects an
expectation of volatility over the next 30 days as
implied by options prices.
generally moves in a different direction than the
broader stock market — which can hedge market
performance. But experts note that movements can be
sharp — such as moving significantly higher when the
stock market declines sharply.
Kudla, CEO for Mainstay Capital Management based in
Grand Blanc, said individual investors can easily be
confused by how some VIX products work because these are
sophisticated derivative securities that "can be
difficult to explain for even a math Ph.D."
because something is ‘mean-reverting’ does not mean
that it is in any way ‘predictable,’" Kudla
noted that the magnitude of losses can be far greater
when compared to the magnitude of rewards.
do not think there was market manipulation with the VIX.
Rather, the result of almost everyone rushing into this
investment (or in an inverse VIX product) over the past
few years has caused sometimes peculiar behavior of the
VIX Index," Kudla said.
the same time, though, investors cannot be lulled into
thinking there is very little risk here just because
many people who seem to be in the know are talking about
investing in volatility-linked products.
are certainly not intended, even by their advocates, as
the sole asset in a portfolio, or as the destination to
park one’s life savings," Kudla said.———