What started as a (mostly) innocent attempt on our part to highlight the multiplying canaries in the ETF coal mine, has recently morphed into a veritable crusade.

When it comes to low-cost, passive investment vehicles, that old saying about “too much of a good thing” certainly applies. The rampant proliferation of ETFs has created all manner of market distortions and it’s by no means clear that the underlying mechanics (the creation/destruction process) will function smoothly in a pinch. In fact, if we learned anything from August 24, 2015, it’s that there’s something horribly wrong with the technicals – even if no one has been able to nail it down with any degree of specificity.

But beyond that, there’s something profoundly frightening about ETFs and ETPs turning hordes of retail investors into derivatives and futures traders. That would be bad enough on its own, but it’s made immeasurably worse by the fact that the retail crowd doesn’t realize it.

Well, on Tuesday, Goldman is out with an exhaustive look at the “popular but often misunderstood” world of VIX ETPs and while we fully intend to give the note the proper treatment when we have time, we wanted to quickly highlight a few brief passages and show you a couple of visuals that should probably give you pause. Needless to say, this is a particularly relevant discussion in the current environment. Enjoy…

Via Goldman

VIX ETPs are benchmarked to VIX futures; not the VIX When the VIX is at historically low levels there is a natural tendency to want to get long volatility and VIX ETPs have become an increasingly popular trading tool. But buyer beware. Not a single VIX ETP actually tracks the VIX. They track VIX futures and the return differential can be large.

Long vol: Strong gains during shocks; tough to buy and hold. Over half of the existing VIX ETP AUM is benchmarked to indices which track the daily return from being long a one-month VIX future. The long vol benchmark has fallen 99.9% since December 2005, for an annualized return of -46.1%. Long vol strategies are simply tough to hold for long periods of time. Why do investors continue to use them? Timely hedges perform very well: 1m VIX strategies were up by an average of 37.3% across the top ten calendar-month declines in the S&P 500 back to 2005.

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