You will see a lot of stories about VIX ETFs and ETNs over the coming days. I have written about the potential for a ETN driven spike in VIX (here).
I have seen a lot of stories about how investors are 'suddenly' nervous about selling volatility and the will typically look at recent fund flow data.
Long VIX Fund Flows versus Short VIX Fund FlowsAt first glance, this chart supports that view. VXX, a long VIX product, has seen strong inflows in the past few weeks. The combination of SVXY and XIV, both short VIX funds, have seen large outflows. That seems simple, but it doesn't tell the whole story.
XIV and VXX accounting for Short Interest Shows A Different Story
The Short Interest - the amount of shares investors have shorted is large on both funds. In fact, on XIV, the inverse product, more shares are shorted than are outstanding! This data only goes back to July 14th, so it is possible that something has changed in the past two weeks - but both XIV and VXX are heavily shorted.
When I look at some other ETFs with large short interest relative to shares outstanding XRT (a retail ETF) immediately hits the radar screen. I can understand why investors want to short retailers (I don't necessarily agree, but I can understand it).
I cannot understand why there is such large short interest in BOTH the long and short VIX products! Actually, I can. It is a strategy that tries to capture the re-balancing mechanism between the long and short products on a weekly basis. This sophisticated strategy has been successful as the underlying funds have been so volatile (I saw a recent reading that showed VXX had a beta of 10 versus the S&P 500 - so it moved 10 times as much on average).
When I look at other long/short "pairs" like TLT vs TBT or DUST vs NUGT I don't see this same pattern of large short interest in both.
In general, investors seem to be happy to 'place their bet' on the appropriate product.
On VIX ETFs and ETNs, there are strategies that involve being short both - that seem to work and may actually dominate the flows.
While I think fund flows are important, it is crucial to watch short interest too or you may be getting the wrong signals.