NEW YORK--With investors staring down the barrel of the U.S. government default, readings on the stock market's so-called fear gauge have jumped--and trading volume in exchange-traded securities that track the CBOE Volatility Index has surged.
However, many investors are using a rise in the VIX as a chance to cash out.
As the VIX jumped from 16.7 at the end of the day Friday to a high of 21 Wednesday, the $1.5 billion iPath S&P 500 VIX Short-Term Futures exchange-traded note (VXX) has gained 8.7%, while the S&P 500 is 2% lower. Trading volume in the iPath ETN Tuesday hit its highest level in four months.
The products track futures on the VIX, not the VIX itself.
Gains have been bigger for leveraged VIX products. The ProShares Ultra VIX Short-Term Futures (UVXY) and VelocityShares Daily 2x VIX Short-Term ETN (TVIX) are both up 17% this week. Tuesday's trading volume in both hit record highs.
Those moves higher in price have generally been greeted with investor selling, cashing out after the VIX has spent most of 2013 near multi-year lows.
The $1.5 billion iPath ETN has seen $188 million in outflows since last week's government shutdown, while the $272 million the ProShares Ultra VIX fund has seen $114 million walk out of the door, according to IndexUniverse. The VelocityShares 2x VIX ETN's assets are flat.
"People who buy these as hedges, or portfolio insurance, are taking money off the table," said Adam Grimes, chief investment officer at Waverly Advisors, which provides tactical research for traders and money managers.
Outflows show that some investors who bought the products as hedges are already cashing out.
The last time the VIX staged a major rally, in August 2011, the fear gauge shot up 50% in a single day to 48. But fund flows indicate that traders aren't yet betting that the current wrangling will play out to that extreme.
Market participants caution that daily flow statistics don't provide a complete picture of investors' moves. Market makers can sometimes wait days before going to the ETF sponsors to create or redeem shares.
But recent outflows match the mood of this market, they say.
"We don't think this is one of those environments that will lead to more and more volatility, or see anything really scary happening," Mr. Grimes said. He's telling clients not to expect a situation akin to 2011.
There are signs that some investors are not only cashing out, but betting that volatility is going to fall.
The $339 million VelocityShares Daily Inverse VIX Short Term ETN (XIV) has taken in $108 million since the shutdown. Its price moves in the opposite direction as VIX futures, rising 3.1% Wednesday as the VIX ticked lower.
And historically, big VIX moves tend to act as harbingers of a rebound in the stock market. The VIX jumped 20% or more 13 separate times over two consecutive trading sessions since the start of 2011. The S&P 500 was higher a week later every time, according to Schaeffer's Investment Research in Cincinnati.
"You get this big surges and panic, and just as quickly the volatility can implode as the worst fears don't happen," Mr. Detrick said.
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