BlackRock has hit out at the dangers of inverse and leveraged exchange-traded products (ETPs) after Monday’s sharp sell-off, during which three US-listed ETPs that benefit from lower volatility suffered heavy losses and suspended trading.
The VelocityShares Inverse VIX Short-Term ETN and VelocityShares Daily Inverse VIX Medium-Term ETN fell 14.32% and 12.73%, respectively, while the ProShares Short VIX Short-Term Futures ETF was down nearly 32%.
Trading for all three ETPs was halted after Monday’s market activity.
The three ETPs provide inverse or short exposure to the Cboe Volatility index (VIX), which is known as Wall Street’s ‘fear gauge’ and measures the volatility of the S&P 500 index, essentially betting that it will stay low or fall further.
Shorting volatility has become an increasingly popular strategy as investors' hunt for yield pushed them toward more esoteric measures.
For the last two and a half years it has worked well as the VIX has stayed stubbornly low of late and fell to 8.56 at one point in 2017.
It spiked to as high as 50 early Tuesday morning but has since fallen to 37 mid-day Tuesday.
Following the ETPs falls, BlackRock issued the following statement: ‘Inverse and leveraged exchange-traded products are not ETFs, and they don’t perform like ETFs under stress. That’s why iShares does not offer them.’
Credit Suisse, which is the largest investor and issuer of the VelocityShares Inverse VIX Short-Term ETN, has pulled the plug on the product. The firm said that it will no longer issue new units of the product and its last trading day is expected to be February 20.
ProShares, which has more than $29 billion assets in ETFs, said that the Monday performance of the ProShares Short VIX Short-Term Futures ETF was consistent with its objective and reflected the changes in the level of its underlying index.
‘We expect the fund to be open for trading today and we intend to continue to manage the fund as usual,’ said the firm in a statement.
BlackRock also called for tighter regulation that could differentiate inverse and leveraged exchange-traded products from plain vanilla ETFs.
'BlackRock strongly supports a regulatory classification system that would label levered and inverse ETPs differently than plain-vanilla ETFs in order to clarify for both regulators and investors the risks associated with those products,’ said the firm.