Short-term volatility futures tracking exchange-traded funds fell more than 2% on Monday.
The markets were flat on Monday, so it should be no big surprise that volatility-tracking exchange-traded products were among the biggest flops of the day The Dow Jones Industrial Average fell 0.03% to 21,408.52 and the S&P 500 gained 0.09% to 2427.43. Meanwhile the CBOE Volatility Index or the VIX settled just below 11.
But don’t let low volatility lull you into a false sense of security. “[C]urrent prices and low volatility suggest that the market thinks it’s in a benign macro environment,” wrote Brian Singer, head of William Blair‘s dynamic allocation strategies team and portfolio manager of the Macro Allocation Fund (WMCNX) in a blog post last week. It’s not.
Singer says that a combination of factors — a significantly different market structure, yield-starved investors turned vol traders and quant-driven sector rotation — have driven volatility to “artificially low levels.”
Macro Risk Advisors‘ Pravit Chintawongvanich, in a report published today, noted that 2017 is on track to be the worst year ever for trend-following based on the annualized return and Sharpe ratio of the Barclayhedge BTOP 50 index. One reason for that might be low volatility. He wrote: “There is extremely low volatility across asset classes, not just equities. That could be leading to a generally trendless environment. Trend followers typically do well during periods of high volatility.” The only trend that has been working, he says, is being long equities.