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iShares are the Market? and Fear the VIX


Paul Amery, Index Universe, iShares’s Claims Make Me Nervous, here. Like the short history of securitisation link.

iShares, it appears, judging by recent statements, has big ambitions for its ETFs to be seen as more than just tradeable index funds. The firm appears to want its funds to combat futures and other derivatives markets as well as to take on, to some extent, the role played by individual stocks.

All the same, Wiedman’s comments make me uneasy. They remind me of the point at which another financial innovation went wrong.

That new force in the financial markets was securitisation, a technique that gained the plaudits I mentioned in the opening paragraph. It was indeed hailed as a democratising force, one that enhanced the tradeability of previously illiquid assets and which brought down access costs to the financial markets. There’s an excellent short history of the topic on the Economist website.

Simon Jessop, Reuters, Stock ‘fear gauge’ flawed, Citi quity trading chief says, here.

The VIX reflects Standard & Poor’s 500 .SPX options prices and, therefore, expectations of future market moves. The idea is that as people become fearful of losing their money, they are more willing to buy a put option as protection.

At the moment, it remains at very low levels.

“A big mistake the market makes is looking at the VIX as an indicator of stock market risk. Why? Because it’s an asset class and it’s more traded for yield than protection,” Pringle said.

“The growth of structured products around VIX drove that move. In most cases, the VIX is sold to generate yield but during some stress periods, the weakness in the spot level triggers significant computer-generated technical buying from these products,” he said.

The VIX is widely followed as an indicator of investor sentiment, although there has long been debate over its efficacy as more financial instruments are derived from it.

“It’s still relevant in extremes, but not in a normal functioning market,” Pringle said.


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