As I've discussed before, the nature of the VIX and its technical dangers provide a large disincentive to ETF issuers.  In the absence of a VIX ETF, however, there remain other options to effectively purchase volatility.  Transaction costs remain a large issue in any such endeavor, and so I have constructed what is most likely the simplest option. 

The most VIX-correlated ETFs on the market are, nearly without expection, ProShares Ultra or UltraShort ETFs.  It is likely that ProShares or their managing counterparty is using volatility contracts of some type in the management of these products.  As a result, one of the most efficient proxies to volatility is to purchase equal amounts of SDS, the UltraShort S&P500 and SSO, the Ultra S&P 500.  This portfolio yields the following returns against the VIX:

The daily log-return correlation squared here is 74%, and the weekly log-return correlation squared is 73%.  As I've noted in previous analysis, however, cumulative return series diverge temporarily without failure.  The daily cumulative log-return correlation squared is 64%, dropping to 58% when moving to weekly cumulative log-returns.

    After closing above 20 on the 26th of July, the CBOE Volatility Index has closed above this mark since.  Only on July 27th, July 31st, and August 8th has the VIX even touched below 20 intraday.  Since August 8th, the VIX has remained entirely above this mark, with option premiums and volatility bouncing between primarily between 20 and 30.  The Volatility Index hit its peak on August 16th, touching 37.5 on runaway fears. 

    As this past summer has seen a long-term regime change in the systemic market volatility, discussion of the VIX and other volatility indices has picked up dramatically.  Though volatility has been an issue many times in the past, however, one thing has changed since the last period of high volatility - more and more investors expect more and more complicated products to be tradeable in easier and easier ways.  For example, the ETF market has provided a large number of products specializing in commodities, bonds, and even inverses.  None of these are assets that are impossible or sometimes even difficult to trade, but in sum, there are hundreds of ETFs and CEFs new in the past 10 years that provide nothing but access to these holdings. 

    As we discuss volatility, though, there are a number of problems.  First, although the VIX is the most understood volatility proxy, its products are by no means the most liquid.  Secondly, the VIX is designed as an theoretical price, not an asset - this is advantageous in that it is quoted in units of the underlying asset, but volatility is much more expensive and difficult to hedge than variance.   This is obvious when one compares the liquidity of the variance swap market to any VIX-related derivatives, though somewhat confusing to the an outside investor who is told that they are merely related by squaring or square-rooting.

    Having admitted that the variance swap market is very liquid, and that the two are related by such a simple mathematical operation, why then is a volatility ETF still so far away?  The problem is likely due to the fact that the reason outside investors want a volatility proxy is diametrically opposed to the safety of the ETF issuer.  When ETF investors discuss the VIX and their desire for such a product, they are not thinking of realizing the arbitrage profit between implied and future realized volatility - they're thinking of realizing a hedge against the Poisson jump part of the Merton market model.  The problem is that these larger shocks are nearly impossible to hedge against without high expenses, and given the volatility of volatility in the market presently, such losses would likely sum to a figure that would have the ETF holders even more upset than various oil commodity ETF holders earlier this year.  Add to this the fact that nearly all products are OTC markets and the asymmetry of risk for buyer and seller in any risk market and you probably have those insurance and risk analysts putting up roadblocks left and right.

    Don't get me wrong, I am all for a volatility proxy ETF myself, and have even seen hits on this site originating from various ETF issuers on the very topic of replicating the VIX, but I'm not too optimistic in the short term for a product with a safe and sustainable structure.  While I'm out on the line making predictions though, let me add this last one as a hedge - if we do see a volatility-tracking ETF in the next 2 years, expect it to come with one of the top 5 expense ratios in the market.

    Weakness perceived in the NY Fed statement and especially in the overall financial industry has finally driven the VIX through 30, a number not seen since April of 2003. 

    The VIX has broken below 20 just before 10:30 in morning trading on what appears to be convincing volume.  Though China and yesterday's FOMC statement have been taking their toll on treasuries, the volatility correction seems to be most apparent in the correction going on between the Russell 2000 and the S&P 500.  Note how the Russell's differential strength versus the S&P skyrocketed, forecasting the VIX drop.  The market seems to accept now that the FOMC statement did not change its stance on the relative securities of large and small caps over the last month, and is thus correcting accordingly.  As of 11 o'clock, the Russell ETF is trading at over twice the return of the S&P 500 ETF, with IWM up over 3% and SPY up near 1.25%.

    Here I provide further evidence that the relationship between return and capitalization is a function of underlying market volatility.  I very much intend to raise questions about the supposed evidence that large caps must again outperform small caps, as to propose this without any conditions on risk would imply obvious arbitrage (e.g. short small caps and put the proceeds into large caps for the difference in return).

    Here is a chart of the VIX, S&P 500, and Russell 2000 over the last 3 days.  Notice how when the VIX drops, the difference between the Russell and the S&P grows, and when the VIX gains, the Russell and S&P return to equal levels.