In a bold move that flips conventional wisdom on its head, JPMorgan Chase & Co. has launched the Inverse VIX Short-Term Futures ETN, dubbed VYLD, which is tailored to profit from decreasing market volatility. This product stands in stark contrast to the general expectation among market participants who anticipate continued or increasing volatility in the months ahead. The newly unveiled VYLD tracks an index that shorts futures on the CBOE Volatility Index (VIX), which is often referred to as Wall Street's fear gauge.
As articulated by Bloomberg, this innovative exchange-traded note (ETN) is set to gain 1% for every point VIX futures decline, before accounting for expenses. With an expense ratio of 85 basis points, VYLD positions itself as a risky yet attractive option for investors who believe that calmer market conditions could prevail soon.
However, investing in volatility-linked ETNs comes with notable risks; their history has been plagued by abrupt failures. For instance, in February 2018, the VelocityShares Daily Inverse VIX Short-Term ETN, another volatility-linked product, collapsed by over 90% in a single session. Such incidents cast a long shadow on the reliability of such instruments, despite the potential for profit.
In the face of current market anxieties, particularly concerning U.S. trade policy, JPMorgan is repackaging a familiar strategy. Todd Sohn, a senior ETF strategist at Strategas, noted, “This is a unique situation,” pointing out that “shorting volatility — through a structure that really doesn’t see much attention anymore: an ETN.” Investors looking to leverage VYLD must grapple with its predecessor's troubled legacy.
Market sentiment has been tumultuous recently, with the S&P 500 experiencing a nearly 8% decline from its record high as fears grow around how tariffs will affect U.S. economic growth and inflation. Meanwhile, the VIX has hovered above its 10-year average for the last month, indicating heightened concern among traders and analysts alike.
Despite these trepidations, interest in VYLD has seen a marked increase according to JPMorgan. Brandon Igyarto, head of Americas structured investment distributor marketing at the firm, stated that VYLD could yield a return profile similar to that of other short VIX products while offering lower drawdowns during sudden market corrections.
Another critical aspect is the structural design of ETNs. Unlike conventional exchange-traded funds (ETFs), ETNs are unsecured debt obligations backed by their issuer rather than the underlying assets, which can amplify risk. This distinguishes them in a crowded market, where the unsustainable model often leads to pronounced losses during extreme market events. Moreover, these products are typically intended for short-term holding periods, making them complex instruments for many investors.
Rocky Fishman, CEO of Asym 500, emphasized that with proper management, short VIX futures can serve an essential function in an investment portfolio. His analysis indicates that a strategy employing inverse VIX futures would have deteriorated significantly over the past decade, losing three-quarters of its value compared to a 10% gain in Treasury holdings. Nevertheless, a 50-50 strategy that balanced both types of investments, alongside active rebalancing, could have generated an impressive return of 165%.
As volatility products continue to evolve, they face challenges in attracting consistent investor interest. Recent data shows that only four out of ten available volatility products have drawn inflows this year, with the 1x Short VIX Futures ETF (SVIX) being the only one garnering around $100 million. Collectively, these products hold approximately $2.5 billion in assets under management.
In summary, while JPMorgan's VYLD represents an intriguing opportunity for those willing to wager on declining volatility, prospective investors must be acutely aware of the associated risks and the storied pitfalls of similar products. The company oversees over $190 billion in ETF assets and operates more than 60 ETFs in the U.S., positioning VYLD as a calculated addition to its expansive portfolio.
