Moms and pops have direct access to the products via platforms run by companies such as E*Trade, which on Tuesday said it would no longer allow investors to bet on volatility exchange-traded funds with borrowed money. Wannabe investors typically must acknowledge the risk of the products before they buy. But that’s usually a mere ticking of a box on a web page.
Good Idea
Still, the Securities and Exchange Commission “doesn’t really ever look at whether an ETF is a ‘good idea’ or ‘risky’ for investors, but rather focuses on the mechanics of how it operates and the accuracy of its disclosures,” Gellasch said. “The agency doesn’t generally pass judgment on the risks or wisdom of a product. An accurately described time bomb for an investor could be approved.”
Seth Golden, a former logistics manager at a Target store, has become a guru of sorts for VIX bettors through his YouTube channel.
“Unfortunately, people get wrapped up when they see markets react so quickly and they get used to the buy-the-dip mentality,” Golden said in an interview from his home in Florida. “You get caught in a manner that doesn’t help you.”
The stock market’s recent run of serenity may have fooled investors into thinking the waters would stay calm forever. The market has been unaffected, so far, by turmoil in Washington. For instance, the average volatility rate for 2017 was lower than every single trading day from Dec. 22, 1995, to June 20, 2005. The VIX finished below a rating of 10 -- super quiet! -- on only nine days before May 2017 and 68 days since.
Wildest Imagination
The current version of the Cboe Volatility Index, a gauge of expected price swings for the S&P 500 Index, was created 15 years ago and is sometimes referred to as the barometer of fear. Initially, it wasn’t intended to be an investment product itself, just a measure of what’s happening in the market.
“In my wildest imagination I don’t know why these products exist,” said Devesh Shah, who helped create the index when he was still in his 20s.
That’s cold comfort for Jamie Evans, who had to tell his wife he’d lost a chunk of their retirement savings on an XIV wager.
“I actually appreciate it that Vanguard allowed me to buy it,” he said. “They gave me a warning along the lines of ‘You’ve got to be really stupid to buy this thing.’ I knew it was a gamble. The way it works on the back end is just way over my head and I shouldn’t have gotten into it.”
This article was provided by Bloomberg News.