A Derivative of a Derivative

Below is an excerpt from a recent article in Barron's by Michael Santoli. Here's his take on products that facilitate the making of directional bets on the VIX (VIX) index via ETFs that own VIX Futures.

An example, among many others, of so-called product innovations that have created convenient ways to bet on subtle market relationships.

I wouldn't go near these vehicles. In most cases, they are worse than useless.

Here's a couple of excerpts:

There are more than a dozen ETFs that allow everyone, including your boneheaded neighbor, to trade permutations of the VIX index...

Santoli goes on to explain that...

Millions of dollars a day...are traded in a derivative of a derivative of a statistical byproduct of other derivatives' pricing.

No wonder investors generally are glum and perplexed. Not only is there little low-hanging fruit, but investors feel forced to climb to the top of trees just to eat the leaves.

Check out the full article. It might actually be comical if it wasn't such a serious mess.

Not only do we have more rapid fire trading than ever of plain vanilla equities, modern financial markets have increasingly become layers upon layers of side bets.

These bets have little or nothing to do with making markets function more effectively.

We don't need these kinds of innovation in finance. It's OK to be boring in finance. What we want is innovation in widgets. - Charlie Munger

Instead, they are best at generating fees/commissions that add nothing but costs and unnecessary complexity.

Better to buy shares in a good business when cheap and just avoid this kind of folly.

Adam

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