Why do volatility stocks/ETFs (TVIX, VXX, UVXY) trend down in the long-term?
"In an attempt to express this complicated fact in lay terms I shall focus exclusively on the most influential factor effecting the seemingly bizarre outcome you have noted, where the price chart of VIX ETFs indicates upwards of a 99% decrease since inception. Other factors include transaction costs and management fees.  Some VIX ETFs also provide leveraged returns, describing themselves as ""two times VIX"" or ""three times VIX"", etc. Regarding the claim that volatility averages out over time, this is supported by your own chart of the spot VIX index. EDIT It should be noted that (almost) nobody holds VIX ETFs for anything more than a day or two.  This will miminise the effects described above.  Typical daily volumes of VIX ETFs are in excess of 100% of shares outstanding.  In very volatile markets, daily volumes will often exceed 400% of shares outstanding indicating an overwhelming amount of day trading." There is more than a single reason why TVIX loses value over time. Futures curve. VIX is always expected to trend up when under 20(although this could change in the future). This means 1 month away futures contracts are bought at a premium closer to 20. If the .VIX stayed flat at 15, by the end of the month, that contract is only worth about 15. meaning you lost 25%. This affects all VIX ETFs and makes inverse VIX ETFs attractive to hold(if you don't mind your account blowing up periodically). Leverage decay. if VIX goes down 25% two consecutive days, your x2 ETF(TVIX, UVXY) goes down 75%. Even if it doubled back to yesterday's value next day, you'd still be 25% down. ETF funding costs. The fund managers take some money from the pot every day. "Since these indices only try to follow VIX and don't have the underlying constituents (as the constituents don't really exist in most meaningful senses) they will always deviate from the exact numbers but should follow the general pattern. You're right, however, in stating that the graphs that you have presented are substantially different and look like the indices other than VIX are always decreasing. The problem with this analysis is that the basis of your graphs is different; they all start at different dates... We can fix this by putting them all on the same graph:  this shows that the funds did broadly follow VIX over the period (5 years) and this also encompasses a time when some of the funds started. The funds do decline faster than VIX from the beginning of 2012 onward and I had a theory for why so I grabbed a graph for that period. My theory was that, since volatility had fallen massively after the throes of the financial crisis there was less money to be made from betting on (investing in?) volatility and so the assets invested in the funds had fallen making them smaller in comparison to their 2011-2012 basis.  Here we see that the funds are again closely following VIX until the beginning of 2016 where they again diverged lower as volatility fell, probably again as a result of withdrawals of capital as VIX returns fell. A tighter graph may show this again as the gap seems to be narrowing as people look to bet on volatility due to recent events. So... if the funds are basically following VIX, why has VIX been falling consistently over this time? Increased certainty in the markets and a return to growth (or at least lower negative growth) in most economies, particularly western economies where the majority of market investment occurs, and a reduction in the risk of European countries defaulting, particularly Portugal, Ireland, Greece, and Spain; the ""PIGS"" countries has resulted in lower volatility and a return to normal(ish) market conditions. In summary the funds are basically following VIX but their values are based on their underlying capital. This underlying capital has been falling as returns on volatility have been falling resulting in their diverging from VIX whilst broadly following it on the new basis."
"What exactly do you need explained?  Short term returns show ""fat tails"" in their distribution.  Long term returns converge towards a gaussian distribution.  The authors think there's a connection between this and the ""long memory"" of volatility (i.e. that the autocorrelation of absolute volatilities also has a fat tail)." "This is a classic correlation does not imply causation situation.  There are (at least) three issues at play in this question: If you are swing- or day-trading then the first and second issues can definitely affect your trading.  A higher-price, higher-volume stock will have smaller (percentage) volatility fluctuations within a very small period of time. However, in general, and especially when holding any position for any period of time during which unknowns can become known (such as Netflix's customer-loss announcement) it is a mistake to feel ""safe"" based on price alone. When considering longer-term investments (even weeks or months), and if you were to compare penny stocks with blue chip stocks, you still might find more ""stability"" in the higher value stocks.  This is a correlation alone — in other words, a stable, reliable stock probably has a (relatively) high price but a high price does not mean it's reliable. As Joe said, the stock of any company that is exposed to significant risks can drop (or rise) by large amounts suddenly, and it is common for blue-chip stocks to move significantly in a period of months as changes in the market or the company itself manifest themselves. The last thing to remember when you are looking at raw dollar amounts is to remember to look at shares outstanding.  Netflix has a price of $79 to Ford's $12; yet Ford has a larger market cap because there are nearly 4 billion shares compared to Netflix's 52m." In the case of VFIAX versus VOO, if you're a buy-and-hold investor, you're probably better off with the mutual fund because you can buy fractional shares. However, in general the expense ratio for ETFs will be lower than equivalent mutual funds (even passive index funds). They are the same in this case because the mutual fund is Admiral Class, which has a $10,000 minimum investment that not all people may be able to meet. Additionally, ETFs are useful when you don't have an account with the mutual fund company (i.e. Vanguard), and buying the mutual fund would incur heavy transaction fees. Significantly less effort to buy into any of several international bond index funds. Off the top of my head, VTIBX. Its hard to write much in those comment boxes, so I'll just make an answer, although its really not a formal answer. Regarding commissions, it costs me $5 per trade, so that's actually $10 per trade ($5 to buy, $5 to sell).  An ETF like TNA ($58 per share currently) fluctuates $1 or $2 per day.  IXC is $40 per share and fluctuates nearly 50 cents per day (a little less).  So to make any decent money per trade would mean a share size of 50 shares TNA which means I need $2900 in cash (TNA is not marginable). If it goes up $1 and I sell, that's $10 for the broker and $40 for me.  I would consider this to be the minimum share size for TNA.  For IXC, 100 shares would cost me $4000 / 2 = $2000 since IXC is marginable.  If IXC goes up 50 cents, that's $10 for the broker and $40 for me.  IXC also pays a decent dividend.  TNA does not.  You'll notice the amount of cash needed to capture these gains is roughly the same. (Actually, to capture daily moves in IXC, you'll need a bit more than $2000 because it doesn't vary quite a full 50 cents each day). At first, I thought you were describing range trading or stock channeling, but those systems require stop losses when the range or channel is broken.  You're now talking about holding forever until you get 1 or 2 points of profit.  Therefore, I wouldn't trade stocks at all.  Stocks could go to zero, ETFs will not.  It seems to me you're looking for a way to generate small, consistent returns and you're not seeking to strike it rich in one trade.  Therefore, buying something that pays a dividend would be a good idea if you plan to hold forever while waiting for your 1 or 2 points. In your system you're also going to have to define when to get back in the trade.  If you buy IXC now at $40 and it goes to $41 and you sell, do you wait for it to come back to $40?  What if it never does?  Are you happy with having only made one trade for $40 profit in your lifetime?  What if it goes up to $45 and then dips to $42, do you buy at $42?  If so, what stops you from eventually buying at the tippy top?  Or even worse, what stops you from feeling even more confident at the top and buying bigger lots?  If it gets to $49, surely it will cover that last buck to $50, right? /sarc What if you bought IXC at $40 and it went down.  Now what?  Do you take up gardening as a hobby while waiting for IXC to come back?  Do you buy more at lower prices and average down?  Do you find other stocks to trade?  If so, how long until you run out of money and you start getting margin calls?  Then you'll be forced to sell at the bottom when you should be buying more. All these systems seem easy, but when you actually get in there and try to use them, you'll find they're not so easy.  Anything that is obvious, won't work anymore.  And even when you find something that is obvious and bet that it stops working, you'll be wrong then too.  The thing is, if you think of it, many others just like you also think of it... therefore it can't work because everyone can't make money in stocks just like everyone at the poker table can't make money.  If you can make 1% or 2% per day on your money, that's actually quite good and not too many people can do that.  Or maybe its better to say, if you can make 2% per trade, and not take a 50% loss per 10 trades, you're doing quite well. If you make $40 per trade profit while working with $2-3k and you do that 50 times per year (50 trades is not a lot in a year), you've doubled your money for the year.  Who does that on a consistent basis?  To expect that kind of performance is just unrealistic.  It much easier to earn $2k with $100k than it is to double $2k in a year.  In stocks, money flows TO those who have it and FROM those who don't. You have to plan for all possibilities, form a system then stick to it, and not take on too much risk or expect big (unrealistic) rewards. Daytrading You make 4 roundtrips in 5 days, that broker labels you a pattern daytrader.  Once you're labeled, its for life at that brokerage.  If you switch to a new broker, the new broker doesn't know your dealings with the old broker, therefore you'll have to establish a new pattern with the new broker in order to be labeled.  If the SEC were to ask, the broker would have to say 'yes' or 'no' concering if you established a pattern of daytrading at that brokerage. Suppose you make the 4 roundtrips and then you make a 5th that triggers the call.  The broker will call you up and say you either need to deposit enough to bring your account to $25k or you need to never make another daytrade at that firm... ever!  That's the only warning you'll ever get.  If you're in violation again, they lock your account to closing positions until you send in funds to bring the balance up to $25k.  All you need to do is have the money hit your account, you can take it right back out again.  Once your account has $25k, you're allowed to trade again.... even if you remove $15k of it that same day.  If you trigger the call again, you have to send the $15k back in, then take it back out. Having the label is not all bad... they give you 4x margin.  So with $25k, you can buy $100k of marginable stock.  I don't know... that could be a bad thing too.  You could get a margin call at the end of the day for owning $100k of stock when you're only allowed to own $50k overnight.  I believe that's a fed call and its a pretty big deal. Options pricing is based on the gap between strike and the current market, and volatility. That's why the VIX, a commonly accepted volatility index, is actually just a weighted blend of S&P 500 future options prices.  A general rise in the price of options indicates people don't know whether it will go up or down next, and are therefore less willing to take that risk.  But your question is why everything underwater in the puts chain went higher, and that's simple: now that Apple's down, the probability of falling a few more points is higher. Especially since Apple has gone through some recent rough times, and stocks in general are seen as risky these days. As the commenters have already indicated, money market mutual funds are not guaranteed to maintain principal during all market conditions, and investments in mutual funds are not insured against loss due to market changes. That said, you can run a price search on Vanguard's website and see these results: So, despite all the economic problems since 1975, VMMXX has never traded at a price other than $1.00. you very well may know better than me, honestly; but with any volatile investment, it is necessarily hard to predict their intermediate term trends. that would be my only caution to you!  if you want speculative positions to hold, you might consider lower priced biopharms (though not pure penny positions). i made a bit of money on CCXI, for example. if you want more engagement/trading activity, consider tech trading or options (my personal favorite). Volatility typically decreases when stocks rise except pending news events or fast markets.  It has a great impact of the premium of the option. Volatility is a shitty metric and is sample dependent, What is more interesting is point recurrence, i.e. how many times has a certain point been touched in x time, you can make good day trading strategies off point recurrence (relative that is). great example of levered tracking error is any 2x/3x VIX etf. during periods of high volatility (like last week) you will be able to realize much higher returns on the underlying index as the levered and inverse ETFs are unable to replicate their intended performance using market securities.  it is not uncommon to see the VIX up ~30% with levered ETFs only netting ~10-12% as opposed to the intended 60 or 90%, for example I would say the real story is less about the implications of low vol but rather what has caused it. IMO that would be:  1) lots of money chasing a handful of investments    a) loose monetary policy    b) wealth effects from fantastic returns since the GR    c) consolidation in various sectors (health, energy, tech)  2) rise of low cost index funds (all inflow go into the large swathes of the market so volatility across stocks is dampened)   3) various externalities of expansionary Fed policy    a) resulting low bond yields lead to larger flows into equities     b) low cost of debt feeding buybacks     c) it has been sustained for so long it has had stabilizing effect i.e. predictability is good for markets and business decision making   These factors make for an interesting story because what happens when some component of this system begins to show cracks? What happens when this low vol feedback loop ceases? Nobody knows. But it will not continue ad infinitum. Not all doom and gloom but it won't be the market we are used to today. That's not 100% correct, as some leveraged vehicles choose to re-balance on a monthly basis making them less risky (but still risky).  If I'm not mistaken the former oil ETN 'DXO' was a monthly re-balance before it was shut down by the 'man' Monthly leveraged vehicles will still suffer slippage, not saying they won't.  But instead of re-balancing 250 times per year, they do it 12 times.   In my book less iterations equals less decay. Basically you'll bleed, just not as much.  I'd only swing trade something like this in a retirement account where I'd be prohibited from trading options. Seems like you can get higher leverage with less risk trading options, plus if you traded LEAPS, you could choose to re-balance only once per year. One of the often cited advantages of ETFs is that they have a higher   liquidity and that they can be traded at any time during the trading   hours. On the other hand they are often proposed as a simple way to   invest private funds for people that do not want to always keep an eye   on the market, hence the intraday trading is mostly irrelevant for   them. I am pretty sure that this is a subjective idea. The fact is you may buy GOOG, AAPL, F or whatever you wish(ETF as well, such as QQQ, SPY etc.) and keep them for a long time. In both cases, if you do not want to keep an on the market it is ok. Because, if you keep them it is called investment(the idea is collecting dividends etc.), if you are day trading then is it called speculation, because you main goal is to earn by buying and selling, of course you may loose as well. So, you do not care about dividends or owning some percent of the company. As, ETFs are derived instruments, their volatility depends on the volatility of the related shares. I'm wondering whether there are secondary effects that make the   liquidity argument interesting for private investors, despite not   using it themselves. What would these effects be and how do they   impact when compared, for example, to mutual funds? Liquidity(ability to turn cash) could create high volatility which means high risk and high reward. From this point of view mutual funds are more safe. Because, money managers know how to diversify the total portfolio and manage income under any market conditions. Has the VIX always received this much attention? I feel like I never really saw articles on it until about 2 years ago, and the attention has especially ramped up post election. Granted, I'm young and may have just not been aware.  As the post alludes to, I think a big problem is people's interpretation of VIX being the market expectation of volatility. In a mathematical sense, that would only be valid if 1) the price of options perfectly reflects volatility, and 2) investors can rationally evaluate the future.   (1) is arguable as volatility is just the single free parameter in BS and captures all confounded factors in the price, including supply/demand mismatches. (2) is debatable just because it essentially assumes that the wisdom of crowds will be true on average. My prior on this is that they're correct that often, and that the VIX is probably a pretty poor predictor of future realized volatility. I'll check this last claim and edit.