Did Volatility ETFs Drive the Market’s Selloff?

These funds have no place among everyday investors

Leaves and open umbrella blowing along street
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Rising U.S. Treasury yields were widely cited as the spark that ignited early February's sharp selloff in stocks. But the real damage, in my view, was caused by a handful of arcane exchange-traded funds and other products that let traders place giant wagers on the direction of the CBOE Volatility Index, known by its symbol VIX and often called the “fear index.” The good news: The selloff already may be finished. But regardless of whether it’s behind us, you certainly should stay away from these dangerous volatility ETFs.

The stock market’s volatility had been incredibly low the past two years as the market ambled placidly higher. Traders placed bets that the low volatility would continue. These bets were incredibly profitable. The ProShares Short VIX Short-Term Futures ETF (SVXY, $11.34), for instance, gained 80.3% in 2016 and 181.8% last year.

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Steven Goldberg
Contributing Columnist, Kiplinger.com
Steve has been writing for Kiplinger's for more than 25 years. As an associate editor and then senior associate editor, he covered mutual funds for Kiplinger's Personal Finance magazine from 1994-2006. He also authored a book, But Which Mutual Funds? In 2006 he joined with Jerry Tweddell, one of his best sources on investing, to form Tweddell Goldberg Investment Management to manage money for individual investors. Steve continues to write a regular column for Kiplinger.com and enjoys hearing investing questions from readers. You can contact Steve at 301.650.6567 or sgoldberg@kiplinger.com.